Some Materially Strong Stocks

One of my favorite themes headed into this year was the expected recovery in residential and non-residential construction demand.

I keep track of a number of factors within the manufacturing segment: ISMs, PMIs, factory orders, new/existing/pending home sales and the Architectural Billings Index. All of these metrics have shown improvement throughout the year. Both the ISM and PMI reports have been comfortably above the expansionary level mark of 50 for more than a year and the most recent ABI report showed inquiries at the highest level since 2005.

But more importantly, I listen to company conference calls and in 2Q there were several companies that indicated the environment was showing signs of life.  Companies like Ingersoll-Rand (IR) , Lennox International  (LII) , Armstrong World  (AWI) , United Technologies (UTX) and Johnson Controls  (JCI) all pointed to green shoots. Even the disappointing quarter from Eaton  (ETN) showed improved bookings in each of its electrical divisions, which was confirmation of the trend. 

What’s likely helping the trend is the fact that interest rates have stayed low -- much lower than I expected. In fact, if you ask me what’s the biggest surprise year to date, it's the 10-year bond yield at 2.36%, down from 3% seen at the end of last year. There are a lot of factors weighing on bond yields, such as the geopolitical issues, the continuation of QE by the Federal Reserve, the unknown of tapering back some of these QE efforts and the fact that Europe is teetering on going back into recession as Russian sanctions have put pressure on this region. Japan has decelerated from its recent recovery and China remains a wildcard on whether it can grow at its targeted rates.

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