Green Shoots Have Grown

The Dow Industrials and the S&P500 each set all-time highs to end the week. The European Central Bank moved to fight deflation/disinflation (your choice) by moving its overnight bank lending rate to less than zero. The Bureau of Labor Statistics told us that, with the better than expected employment gains, we’ve gained back all the jobs lost since the recession. And the Fed added to the mix with the release of the May edition of its monthly Beige Book report. Each of the 12 districts reported having expansion during the month.

Good way to start a new month, I’d say.

About the title

Remember in 2009 and 2010, there was a phrase that was in vogue during that time that referred to those first signs of economic recovery as being “green shoots”; the first indications that growth was returning.

The stock market, being a forward-looking economic indicator, has almost tripled from the 2009 lows. It’s done so because it was benefiting from the effects of the wide-ranging – though slow – economic growth and its continuance. Yet today, in spite of the growth that has made this the second longest recovery in 80 years (1), we still find most investors remaining more concerned about downside protection than planning how to benefit from the upside.

The actual market results have had little effect on that view – skepticism has remained the prevailing national attitude, in spite of the market results. The “yeah, buts…” have maintained their influence over most people’s thinking, creating various challenges, crises and stumbling blocks to keep them from fully participating in those results.

Animal spirits

With the employment report as a great example, there seems to be an increasing flow of the number of positive economic reports and indicators, especially over these past few weeks, that can’t be dismissed – even by the “yeah, buts…”.

Looks to me as if this can be leading to the stirring of the animal spirits in the marketplace. This is a term first mentioned in a 1936 book by John Maynard Keynes. He described the spirits as the, “instincts, proclivities and emotions that ostensibly influence and guide human behavior”. Those spirits seem to finally be starting to come out from behind the rocks where they’ve been hiding to realize that things are really pretty good, after all.

How you can participate

I believe that this evolution of the market should position industrial and energy sectors for further share price growth. The energy sector is fairly easy to break down into its various parts for individual investment. Or a solid energy ETF or closed-end fund that has been around a while could allow you to participate.

The industrial sector has three main parts – not counting the respective companies suppliers of goods and services which could also benefit from the related growth. Those parts include transportation, capital goods and commercial and professional services.

Transportation includes those companies involved in aircraft and aerospace, along with trucking companies and railroads, for instance. Capital goods includes appliance makers, heavy equipment manufacturers and cars and light trucks. Commercial can include paper and packaging manufacturers, in addition to waste-management firms.

The point is they all benefit from a growing economy. If you believe as I do that we have another wave of growth coming over the next couple years, then these sectors could be a good way to ride the curl of that wave…

Optimism

A commitment of your assets requires optimism. After 41 years of direct involvement in the markets and all that occurred in our economy and the world over that time, my way of seeing the investment world is this…optimism is the only worldview that squares with the facts and history.

Here’s a short definition of why I have to have this belief.

I started in the financial services industry on 25 April 1973. According to S&P/DowJones Indices, on that day the Dow closed at 930; the S&P500 at 108. Friday, the Dow was just shy of 17,000…the S&P within shouting distance of 1950. Compare that any other publicly available investment type over this time. And…stocks can pay dividends too, so your actual returns could have been even better than simply the growth.

I rest my case.

Cheers!

Mike

(1)  Short Side of Long, 2 Jun 2014

16,924 +88 (ATH)  1949 (ATH)  4321  $1,253  $19.01  $102.77  2.60%  $7.08 – $7.24

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Past performance is not indicative of future returns.  Investing in securities of any type involves certain risks, including potential loss of principal. Investment return and principal value in a bond and/or securities portfolio will fluctuate so that investments, when sold or redeemed, may be worth more, or less, than the original investment.  Investing in sectors may involve a greater degree of risk than investments with broader diversification. International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.