Manufacturing in China and the U.S. slowed in October, which was unsettling to investors who expected to see gains in both countries. Those two reports, compounded by the eurozone's instability, set the stage for a big decline in the market.
But there was a disconnect with the U.S. report. Major manufactures such as Ford, Caterpillar and DuPont said in their recent earnings results that sales growth is accelerating in the U.S. and decelerating in China.
Investors may be undervaluing some of those and other U.S. bellwether stocks, discounting them on the expectations for slowing growth in the U.S. Today's ISM number would seem to support this theory, but I take the opposite view. North American manufacturing businesses are fueling the recovery in this country and quality stocks may be worth considering buying now.
First out today was China's Purchasing Managers Index, which measures manufacturing. The gauge slowed to 50.4 in October from 51.2 a month earlier, the lowest level since February 2009.
The U.S. ISM Manufacturing Survey decreased to 50.8 in October from 51.6. Economists were forecasting an increase. As companies shrunk inventory to reflect demand, growth was diminished. A level above 50 represents growth in the manufacturing sector, whereas a level below 50 represents contraction. Still, an index above 42.5 generally indicates an expansion in the overall economy.
To be sure, China is still in expansion mode, growing at a faster pace than any other leading economy. The moderation in growth is partly being driven by the government's attempt to rein in inflation and asset bubbles. Interest rates have been increased three times and the reserve-requirement ratio was lifted to cap inflation, which is now running at a three-year high. Unlike the U.S., the Chinese government has the ability to reverse the monetary tightening that was implemented over the past few years.
The U.S. economy is slowly emerging from the Great Recession and the manufacturing sector is in the driver's seat. Growing demand from emerging markets and increased capital investment domestically should help drive increased order volume going forward. What's more, domestic companies have the advantage of a tax depreciation allowance on equipment bought before the year ends.
CNBC Data Pages:
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