I’ve been preaching for decades (and discussed in both my books ad nauseum) that the right thing to be doing at any point in time is the exact opposite of what everyone else is doing. If it’s a difficult thing to do it will probably work.
A very smart if somewhat younger portfolio manager (Joseph) asked me this question recently:
“Hi Mr. Spooner, what indicators do you look at when trying to assess the potential for a rotation into cyclicals?”
I was reluctant earlier in the Spring to jump on sectors that are especially sensitive to the global economy. Why? What was everyone else doing?
The Canadian exchange-traded fund industry continues to blossom. By the end of the first quarter of 2012, ETF assets grew to about $49.1 billion, expanding 13.5% for the quarter. More important than the absolute growth numbers, however, is the fact that the industry’s growth was fuelled primarily by net new inflows from investors, not market appreciation.
Truth be known, I expected interest rates to begin to rise and put a damper on the market. I was dead wrong about this, but it turns out I was wise (or rather, lucky) to avoid the stock market.
Back in a May blog I had suggested that holding on to a few growth stocks and cash would be the thing to do, so there’d be some money to invest during the summer slump.
In response to Joseph’s query, it seems pretty safe at this juncture to venture into the more economically sensitive sectors:
- The housing market is improving, but employment in the U.S. still sucks (keeping a lid on U.S. interest rates for awhile yet no doubt).
- Europe’s woes are keeping a lid on global interest rates (at least for countries with a credit rating).
- When we have evidence (now) of an economic slowdown having taken place, rest assured it’s already history (since proof is only available after-the-fact).
Finally, there’s no better indicator for me than a change in direction of commodity pricing. Oil prices rose in the late winter/early spring but did not quite get to the $120 WTI price I was predicting. Prices plunged (as usual) beginning late in the springtime but suddenly look to be firming up along with other commodities. When it comes to picking sectors and stocks, in my experience has been that the easiest place to begin my search is trying to find sectors that were hurt the most during the correction, and are already showing evidence of a rebound in prices. Prices only respond because some of the smarter professional fund managers (buyers) want to get there first.
To save time, here is a snapshot of my own opinions about various S&P 500 sectors. The logic behind my choices are simple: If they performed well (some growth areas did okay as I predicted…..Healthcare and Software but may now be tiring; defensives too like Consumer Staples and REITS were strong with the latter offering at least some yield) then I’d cash in some winning chips and bet on sectors that did terribly but are showing early signs of having turned the corner. The more sensitive to an improvement in the global economy the sectors and companies are, the better.
Cheers and ride safe!