What the Market Wants: Economy Struggles To Recover As Middle East Rages
Economy Struggles To Recover As Middle East Rages
by David Brown, Chief Market Strategist, Sabrient Systems
Things are looking up this week -- if you limit your gaze to recent economic reports. Personal income was up significantly more than the market expected (+1.0% vs. 0.3%); the Chicago PMI came in better than expected, at 71.2 v s. 68.0; and although negative, pending home sales were not as negative as the market thought they would be. There was one number today that was worse than expected, and that was personal spending, up just +0.2% when +0.4% was generally expected.
Last week, in comparison, sharply rising food and oil prices raised inflation alerts for both consumers and economic growth. Granted, we had a very positive consumer sentiment indicator on Friday and a positive consumer confidence number earlier in the week, but remember that both reports were taken well before the most recent breakout of turbulence in oil-rich Libya and the subsequent spike in the price of oil to over $100 a barrel.
You need only to look at last week’s sector performance to get a feel for what’s going on. The only sector in positive territory was Energy, while the worst-performing sectors were those which are highly dependent on oil, such as Transportation and Basic Industries. The sectors least hurt by last week’s turmoil – Public Utilities, Health Care and Consumer Non-Durables – represent a flight to safety, as does the fact that gold and silver prices rose sharply.
Economic Growth Plodding Along. The fourth quarter GDP came in at 2.8% on Friday, versus 3.2% for the third quarter. This indicates the economy is continuing to recover, but more slowly than expected, and that is particularly disappointing in light of the massive influx of QE2 money. There are also hints that the Fed’s levels of accommodation are being stretched, and while I think it is unlikely that they will hike interest rates any time soon, their capacity for continued stimulation is definitely running thin, especially in light of the new GOP majority, budget-cutting Senate and a number of shortages and cutbacks by state and municipal governments.
All told, it is hard to believe that economic growth will do much better than slowly plod along, and that isn’t very good news for employment or for the housing market.
To be sure, money continues to flow out of the bond market ($1.8 billion in January, after the $10 billion in December), and it stands to reason that a lot of it is heading into the equity markets. A significant amount of the QE2 money also seems to be finding its way into the equity markets, so it’s not surprising that the market held its own today. The tug of war between the bulls and the bears is at a near stalemate, but the latest short interest report was up 2%, after falling for many months, which shows the bears are digging in.
The turbulence in the Middle East and the government’s continued efforts to restore domestic economic growth can create a volatile market. So choose your stocks carefully and try to maintain a hedge of some sort. You might check out two weekly (free) Sabrient blogs that recommend ETF hedges: ETF Periscope and Sector Detector. Also, the Sabrient Investor’s (H)Edge Portfolio (a premium product) recommends stocks for shorting, as well as alternative put options.
As for where to find stocks this market wants, the best place last week was Small-cap Value, down just -1.23% for the week; the worst place was Mid-cap Growth, down over -2%. As for sectors, my favorites, considering the current global environment, are Health Care, Technology or Utilities. The sectors to avoid would be Transportation and Consumer Durables.
Click here to see the market stats.
4 Stock Ideas for this Market
This week, I played it conservatively by starting with the Undervalued Large Cap Growth preset search in MyStockFinder (http://MyStockFinder.com). I then up-weighted Technicals slightly. Here are four large cap stock ideas worth considering.
Weyerhaeuser (WY) - Capital Goods
Brookfield Asset Management (BAM) - Finance
Abbott Labs (ABT) - Healthcare
STMicroelectronics (STM) - Technology
Until next week,
David Brown
Chief Market Strategist
Sabrient Systems, LLC
Leaders in Investment Research
http://www.sabrient.com
and http://Twitter.com/ScottMartindale
Full disclosure: The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.