Why Shares of Steelmakers Are Surging Today

What happened

Steel stocks have had a rough go of it lately, as the ripple effects of the government's response to the novel coronavirus pandemic has pulled the emergency brake on manufacturing output. With lawmakers now coming closer to an economic stimulus package deal, the steel industry is heating up.

Nucor (NYSE:NUE), the nation's largest steel manufacturer, is up 9.6% as of this writing. In addition, big steelmakers Steel Dynamics (NASDAQ:STLD), ArcelorMittal (NYSE:MT), and Cleveland-Cliffs (NYSE:CLF)are all up more than 10%.

Image source: Getty Images.

So what

Steel has historically been an economic bellwether industry that depends largely on the health of the construction and automotive industries. It's not as easy to put numbers to the impact that the recent economic halt will have on these industries as it is to other industries such as airlines or restaurants, but the general sense is that hitting the economic pause button will have some lasting ripple effects throughout every corner of the economy.

Just last week, Nucor issued first-quarter guidance that said this quarter's numbers won't likely be impacted significantly, but itexpects to see declinesstarting in the second quarter as construction sites and manufacturing shut down.

Whatever the case may end up being, the market has been pricing in a significant contraction across the steel industry. Cleveland-Cliffs has been hit especially hard: Itrecently acquired AK Steel, already a heavily indebted company, so adding that debt to Cleveland-Cliffs' balance sheet could prove problematic should this economic pause continue.

Steel companies year-to-date performancedata byYCharts.

The news that Congress appears close to an economic stimulus package has been a boon for the broader markets, as it's creating some assurance that the government will provide some economic backstops for both individuals and businesses during this crisis.

Now what

Before making any moves based on today's news, it's important to remember how these past few weeks have panned out. News has been changing so rapidly that the situation could change between when this is published and when you read it. Trying to capitalize on any stock-price movement during any given day is a recipe for disaster. Even though Congress says it's close to finalizing a deal, that deal has not yet been signed, and could lead to yet another wild market turn.

Companies that make great investments are those that tend to be the strongest players in their respective industries. In cyclical industries like steel, companies with great balance sheets that can weather the storm can makegood value investments. If any of these companies were already on your radar before all this stock-price madness, now could be an opportune time to pick up shares. That said, it could be a long time before the market's volatility subsides, so be prepared for a really bumpy ride.

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