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U.S. Industrials Stage a Strong Comeback

Since the stock market bottomed roughly two years ago, U.S. indus- trial stocks have sharply rebounded in a V-shaped recovery. And T. Rowe Price portfolio managers say more gains in this important sector could come.

While surging new orders and exports already have boosted the share prices of many manufacturers, managers say the U.S. economic expansion and increased sales to emerging markets could benet many other industrials that tend to perform better later in the economic recovery.

Overall, as is typical after a severe recession, the industrials sector has outperformed the broader U.S. mar- ket since the March 2009 trough— with the sector gaining a cumulative 157.2% through March of this year versus the S&P 500’s 104.5% gain. Only the nancials and consumer discretionary sectors performed better.

During this time, manufacturing production indexes have soared in the developed world—in February they reached their highest levels in almost seven years in the United States and more than 10 years in Europe—while cooling somewhat in China and other parts of Asia.

Even U.S. manufacturing employ- ment, which leaked jobs for more than a decade, has been gaining ground, becoming a relatively bright point in a bleak jobs outlook.

U.S. industrials encompass a wide range of companies, with some tending to respond more quickly at the start of an economic recovery and others much later.

While portfolio managers still hold some of these positions for their continued potential, they say that the economy now has moved from the recovery to the expansion phase.

“The early cycle companies did well in 2009 and into 2010,” says Jeff Rottinghaus, manager of the U.S. Large-Cap Core Fund. “But we’re headed into the third year of a cycle, what we might call the middle innings of the economic recovery.”

As a result, managers have reduced holdings in some of these early recovery stocks and turned more toward stocks that may do well in the later stages of the economic cycle, such as aerospace, defense, and construction services stocks.

declines are typically followed by dramatic upswings,” says Greg McCrickard, manager of the Small- Cap Stock Fund.

The second trend is that U.S. man- ufacturers are experiencing increasing demand from emerging markets, which portfolio managers believe will be an enduring—not cyclical—theme. Emerging markets now account for more than half of all U.S. exports.

In evidence long before the down- turn, emerging market demand has accelerated from the strong recoveries in China, India, Brazil, and elsewhere. Moreover, U.S. manufacturers, as well as those in Europe, have beneted from their weaker currencies, which supercharge exports.

Two Trends

Stock Picking

Two trends are at work here, portfolio managers say.

The rst is the typical post- recession business uptick. Manufacturing is among the rst sectors to suffer in a downturn, as customers deplete inventories and cut back on new orders and on capital spending. And the sector is among the rst to pick up in recoveries.

Some portfolio managers say the U.S. economic expansion will continue to propel many industrial stocks, while others are more cau- tious because industrials already have had substantial gains.

“Industrials today are the most favored sector in the market and one of the most richly priced,” says David Giroux, manager of the Capital Appreciation Fund.

“We had a dramatic drop in industrial production, and dramatic

Another reason for caution is increasing commodity and raw

S&P Industrials Sector Outpaces S&P 500 in Market Recovery Total Return Indexed to 100 as of March 9, 2009, Through March 31, 2011



  • S&P 500 Industrials

  • S&P 500 Index



The earliest recovering indus- trials—for example, producers of machinery, automated production lines, and equipment for construction services—have already seen strong returns, with some stocks more than doubling in value from their lows.




3/09 6/09 Source: T. Rowe Price.






12/10 3/11

8 www.troweprice.com

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