For after the correction, think industrial stocks: Market history says this is their time
Are you in the right sectors of the stock market for this point in the economic recovery? (Yes, despite the stock market correction, we are still in an economic recovery.)
Solid data stretching back to 1945 argues that certain industries and sectors outperform during specific stages of any economic recovery. (The best work on this subject comes from Sam Stovall, the chief investment strategist for Standard & Poor’s Equity Research Services. His 1996 book Sector Investing is still the best resource on the subject to my mind.)
My first rule of investing is “Put every trend you can on your side.” Neglecting what we know about what sectors thrive when is in my opinion wasting an asset that could help you make bigger profits.
Stovall divides the economic cycle into four stages.
After this rally I’m still waiting for signs that the economy is in a sustained recovery
Cash flows and cheap money are enough to keep the current rally going into 2010, I believe.
Comparisons with really, really weak quarters in the first half of 2009 for global economies in general and for company earning in particular favor a continuation of the upward trend in stock prices in the quarters that end in March and June 2010, I believe.
After that, though, things begin to look decidedly dicey—unless investors can see clear signs that the growth we’ve seen in the last half of 2009 is sustainable and is building momentum.
On that, unfortunately, the jury is still out.
Take recent numbers from the North American steel industry, for example.
Steel, a leading indicator on the economy, could be turning negative
Steel goes into buildings, appliances, and cars. That makes demand for steel a leading indicator for the economy since companies order steel in antipication of rising sales of their own products.
This summer global demand moved up and so did prices. In August a metric ton of hot-rolled steel went for $600 to $620 a ton. Rising steel prices on rising demand provided a sign that the global economy was headed for recovery.
Now prices have dropped back to $570 a ton, according to World Steel Dynamics.
Does that mean that we’re headed back towards recession again?
Brazil adopts a China-style industrial policy–and the target is China
The Brazilian government has told Vale (VALE), the country’s largest iron-ore producer (and either No. 1 or No. 2 in the world) that it has to do more to build up the Brazilian domestic steel industry rather than just selling iron ore to Chinese steelmakers.
Sounds like a page right out of China’s book of industrial policy. Designate strategic economic sectors, that manual reads, and then develop domestic champions in that sector.
Vale is now exporting record amounts of iron ore to China, the world’sbiggest steel producer. At the same time, Brazil’s budget minister Paulo Bernardo said, in the first six months of 2009 Brazilian imports of flat-rolled steel climbed 26% from the first half of 2008.
In the second quarter of 2009 68% of Vale’s iron ore shipments went to China.
“We cannot be one of the biggest ore producers and ship it all abroad and end up importing steel,” Bernardo said.
Did Vale push back? Did the company say, If we’re really good at producing iron ore–and the company is the world’s low cost producer–then that’s what we should do? Did Vale tell the Brazilian minister to go re-read Adam Smith?
