VIDEO: What Tuesday’s Economic Data Means for the Portfolio and These 4 Positions

In today’s Daily Rundown video, Chris Versace breaks down ISM’s March Manufacturing PMI report and the February Construction Spending report. He touches on why the former will lead to negative revisions in Q1 2025 GDP expectations while the latter is very supportive of four portfolio holdings.

Chris also explains why expectations for tomorrow’s March ADP Employment Change report could be exuberant and why, as of now, we don’t expect a soothing message from Fed Chair Powell on Friday.

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Transcript

CHRIS VERSACE: Hey, everyone. Chris Versace here. As you know, we are kicking off a new quarter today. And no, that is no April fool's joke. It comes as little surprise as we wrap the books on the March quarter that it was a challenging one. But as we discussed in our opening comments with you this morning, including today, every day this week brings some market moving development that we're going to want to pay very close attention to. We outline that schedule of sorts for you in our opening comments today.

So in today's video, I really want to stick to the day's developments thus far and just explain how they fit into our thought process for what's unfolding with the economy, the Fed, and so forth. So with that, let's just jump right into it. The big one for us this morning was the ISM manufacturing PMI for the month of March. It did show a downturn in activity compared to February, landing the headline index back, I'm afraid to say, in contraction territory. However, for us it's always the innards of the report that really matter most.

And when we look there, I have to say that the report is not something that is very constructive for the economy. I say that because new orders, well, they fell to the lowest level since September 2024. Export orders, weak as well. Prices paid. This is what we watch and to gauge the manufacturing inflation pressure that's going on. Well, they hit the highest level since July 2022. And when we look back just over the last few months and chart the data, we see a really steep climb higher. The other line item is employment.

It slowed further, hitting the lowest level in six months with the comment in the report that really stood out to us being de-staffing continued during the month. So I would say that the message from all of these line items is that companies continued to pull orders in due to anxiety about tariffs and pricing pressures. There are also some comments in the report about concerns of Canadian boycotts in falling Canadian demand. When we had office hours yesterday, we shared a story with you about that very topic from Reuters.

So it's something we're going to pay attention to. Now, I'm going to offer a sobering comment here. Yes, the manufacturing PMI report for March was not helpful for the economy. It clearly pointed to inflation concerns continuing as well as a meaningful slowing, if you will, in the manufacturing economy. But let's remember what we shared with you on our opening comments today. Manufacturing is about 15% of GDP. Now, what this means is that yes, at the margin, this report will have some negative revisions to the GDP models out there from the Atlanta Fed, maybe the New York Fed, and a few others.

Fine. But from our perspective, Thursday's March services PMI report is going to be far more important with what it says about new orders and what it implies for the speed of the economy going forward, inflation, and of course, employment. Once we have both of those reports, we'll be much, much more prepared for the February-- sorry-- for the March employment report that comes on Friday. And taking the totality of those reports, along with tomorrow's ADP employment report for March, we'll be that much more prepared for what Fed Chair Powell is likely to say Friday after the employment report.

I believe it's late morning around 11 o'clock or so. So that's the March manufacturing PMI data. Again, not constructive. Going to fan the flames of inflation concerns. But again, we're going to have to get a little more on Thursday to round out the picture of the overall economy. Let's move on to the February construction spending report. Overall, up 0.7% month over month. Better than expected. When we look at it on a year over year basis, which is our preferred way to look at the data, up 2.9%.

Reasonable data, especially when we contemplate that February tends to be plagued by winter weather and wet weather, which is not conducive to construction activity. Breaking the report down, nonresidential up 3.9% year over year. Pretty good. Led by-- and this is the standout-- 6.1% year over year growth in public non-residential construction. As we see it, that tells us that infrastructure programs are moving along nicely. But we're also seeing some year over year gains in private non-residential construction.

Going back to Eaton's Investor Day several weeks ago when they talked about the big backlog of megaprojetcs starting to come on stream in 2025, this data point we're seeing today in non-residential construction activity in February supports that. So we see that as very nice for our positions in United Rentals, Vulcan Materials, Eaton, and to a lesser extent, Waste Management. Now, the other side of the February construction spending report was residential.

And no surprise, just given what's going on with mortgage rates, that it was the weaker part of the report. Still up about 1.6% year over year with public residential of about 2.5%. Private was less so. So I would say that for the four possession positions I just mentioned, certainly the residential side was helpful, but it's not enough for us to make a move on the housing market, especially given the price inflation comments that we shared with you a minute ago. Now, in terms of the larger market today, it's not really going to like the ISM data because it points to the economy slowing.

I do think that they'll give a pass on the construction data. It's candidly February at this point, but from our perspective, a nice confirming data point for what we were talking about several weeks ago. Now, as the market digests that PMI data, it's going to be thinking about the next two focal points. I already mentioned one. That is tomorrow's ADP employment change report for March. The consensus has ADP's number going up to about $105,000 from $77,000 in February.

I will say that based on what we saw in the flash March PMI a week or so ago and today's March manufacturing PMI, that does look to be a little exuberant. I guess, that's the word. The question candidly we're contemplating is, how much of a miss will we need to see in the ADP employment report tomorrow for it to start the market to start thinking that maybe the Fed will need to throw the economy a life preserver? Again, we're not going to jump the gun on that. We're going to want to wait and see what the March services PMI data brings on Thursday and what the employment report for March brings on Friday.

Once we have all of that in hand, we'll be much more prepared for what Fed Chair Powell is likely to say again late morning on Friday. Candidly, as it sits today, do I think he's going to say much? No. And I say that because if you remember that not only is the inflation data moving the wrong way, but Powell has previously said that we may have to face some pain to get to the Fed's 2% target. I doubt that he is going to back off from that. But again, there's a lot of moving pieces not only in the data, but also what we'll learn tomorrow afternoon on the Trump tariff front.

As you know, I continue to be of the mind that it will also be the reciprocal impact of what we hear tomorrow from other countries that are going to matter. And as I think about all of that, I really want to keep our eyes and ears open for any and all negative earnings pronouncements that might come our way. They could start later this week. They might accelerate as more data firms and accelerate more so early next week. So we're going to be on the watch for all of that. But a lot to go over the balance of the week, as you can tell.

So please, be sure to check your emails, your alerts. We want to make sure you're getting our latest thoughts. And yes, we will have more stuff coming your way, so please check those emails and alerts today. And remember, I will be guest co-hosting on the catalyst program at Yahoo Finance tomorrow between 10:00 and 11:00. Tune in. I think it's going to be a great conversation and probably one that you won't want to miss. But for those who can't make it, we will be sharing the clips as we get them. So tune in. Thanks, folks.