Early 2018 exuberance quickly gave way to tariff and trade challenges, with late cycle fears, oil’s sell-off, pressure on mined commodities as well as emerging market concerns all part of a sharp reversal in sentiment. In the process, Machinery surrendered to normal patterns and after a strong 2016-2017, 2018 marked a year of considerable underperformance, despite earnings performing well ahead of initial expectations. Barring a much sooner slow-down than anticipated, Machinery stocks stand well-positioned today. Absolute and relative valuation are at severe lows. Over the past 15 years, there’s only one instance with consecutive years of underperformance vs the S&P 500. Furthermore, in four of the last five U.S. expansions, Machinery stocks peaked only several months before the recession started.  From a cycle perspective, we prefer Ag, Mining and U.S. non-res and general industrial exposure.  We’re more cautious on commercial vehicles following record demand levels in 2018.  While we think pockets of Machinery present a relatively favorable risk/reward, our downturn scenario work suggests a nimble approach with today’s low multiples still not capturing recession downside risk at whatever point a slowdown materializes.

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