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Two months ago most economists and investment gurus had written off the American consumer. The reason was simple, $4.00 a gallon gas was choking off everyone. Foreclosures were going to be more common place than a disgruntled Yankee fan. Corn prices were rising like blood pressure in a traffic jam. Everywhere you turned the consumer was dead.
It’s amazing the difference a month or two and a $47 move down in a barrel of oil makes.
The hottest sectors over the past couple of months have been the retailers, the homebuilders, the restaurants, the transports and, surprisingly, the financials. Historically, these are precisely the sectors that perform best coming out of an economic slowdown. They are known as early cycle stocks.
As we have repeatedly noted within past columns, the stock market usually moves approximately six months prior to changes in the economy. Currently, stocks are forecasting a more consumer friendly environment during the first quarter of 2009. By “consumer friendly,” we are referring to lower interest rates along with lower energy costs and lower food costs.
Despite the above, there are many false starts and investors should be careful not to jump on the sectors as many of the most known names in the consumer space are laden with debt. Recently, we have made purchases of DSW Warehouse recently, a discount shoe retailer with no debt and one that we believe would benefit even if the economy does not strengthen. Restaurant chain McDonald’s is one of our fifteen largest holdings and it too balances between benefiting with a cost conscious consumer as well as an improving economy. We can suggest investors look into Exchange Traded Funds that invest in early cycle sectors such as the S&P Retail ETF, S&P Homebuilders ETF and the S&P Consumer Staples ETF. As always, check with your investment advisor prior to making any investment.
We strongly advise the novice investor to stay diversified and not try and time the markets. As the past few weeks have shown all, the stock market moves confound even the most seasoned investor. Take care and stay invested according to your objectives, tolerance to risk, time horizon and financial obligations. Sometimes the most blatantly direst of economic times produces the strongest of market advances. Timers can miss these moves waiting for a “safer” time to get into the market.