U.S. industrial production data provided a rare positive surprise for investors Tuesday, with reported manufacturing growth at 0.4 per cent for June relative to the 0.3 per cent expected.
U.S. industrial production is relevant for Canadian investors because it moves in close proximity to the performance of the S&P/TSX Small Cap and S&P/TSX Consumer Discretionary Indices. The better-than-expected data provides a positive, if not conclusive, performance tailwind.
The sensitivity of the S&P/TSX Consumer Discretionary index to changes in U.S. industrial production is less surprising when looking at index constituents. Magna International, a major player in the North American auto industry where Canadian and U.S. operations are so intermeshed that national distinctions are often a formality, is among the largest companies in the market cap-weighted benchmark and a primary determinant of index performance.
The single largest member of the index is Thomson Reuters, which generates the majority of its revenue in the United States and abroad.
The close relationship between U.S. industrial production and the domestic small cap index is far more subtle, and is likely largely a matter of investor sentiment rather than economic cause and effect. Investor sentiment, a major driver of valuations in broader smaller company indices, is more likely to be positive when industrial production and economic optimism are rising. Results like Tuesday’s will allow beleaguered investors in domestic small cap stocks to breathe easier, potentially adding to positions.
Tuesday’s positive results could also be a sign that Europe-centered economic anxiety has peaked, at least temporarily, and that the recent trend of disappointing global economic indicators may be at an end.