Signs of recovery in the U.S. economy, though not brisk, are
surely more than what we saw early this year. Spring sprung more
jobs, better housing data, strong manufacturing numbers and
confidence in the country among its citizens. A steady QE wrap up
also gave hints of economic well being. An influence on the stock
market was only natural.
Overseas too, things started shaping up. Though Iraq poses a new
tension and Russia concerns show no signs of cooling off, the
second largest economy in the world, China, has shown stability,
European Central Bank cut the bank deposit rate to the negative
territory and Japanese economy picked up, giving much-needed warmth
to the frozen U.S. economy.
Most sectors benefited from the stock market surge, with a few of
the more cyclical corners making the most of this run-up. These
industries often sag in a slumping economy, but are the biggest
winners when rays of hope are seen.
Even though broad corporate earnings in Q1 caused some concerns
thanks to feeble growth and persistent downbeat guidance, three
cyclical sectors discussed below can deliver better returns this
year and in the next.
Zacks Earnings Trend
Many aggressive stocks were shattered in early 2014 due to
high-beta pain and risk-off trade sentiments prevailing in the
market increasing the appeal for defensive plays. As a result,
investors can put their money into this once beaten-down corner of
the market pinning hopes on favorable fundamentals and reasonable
Below, we have highlighted a few possible choices in this space,
any of which could be interesting for those seeking a cyclical play
at this time:
PowerShares Dynamic Building & Construction (
Recent data on construction spending and other metrics such as
housing starts were favorable. Service providers, including
construction companies and retailers, grew in May at
their fastest speed
in nine months. A low interest rate environment also played its
role in lifting the sector (read:
Has Spring Finally Sprung for Housing ETFs?
This trend can best be tracked by PKB. This 30-stock ETF has its
assets invested across all classes of the market spectrum.
Engineering and construction stocks comprise more than one-fourth
of the fund, followed by construction material companies which
account for 11%. A look at the style pattern reveals that the fund
has a preference for value stocks.
PKB manages an asset base of $126.1 million and has an expense
ratio of 63 basis points. The fund carries a Zacks ETF Rank #3
(Hold) with a High level of risk. PKB was up 4.12% in the last one
month (as of June 10, 2014).
Consumer Discretionary Select Sector SPDR Fund
Spending on consumer discretionary is the first to drop when the
economy is slipping. So, it can be considered a barometer of rising
income levels of consumers and an improving sentiment in the
economy. U.S. consumer confidence which slipped in April
XLY is by far the largest product in the consumer discretionary
space with more than $5.40 billion of assets. In its 88-stock
portfolio, Walt Disney (6.68%), Comcast (6.62%) and Amazon (5.84%)
take top three spots (read:
Will Disney Earnings Spell Magic for Consumer
The ETF charges a meager 16 bps in fees a year. The fund gained
4.65% in the last one month (as of June 10, 2014). XLY has a Zacks
ETF Rank #3 with a Medium risk outlook.
Industrials/Producer Durables AlphaDEX Fund
An industrial boom is apparent in the U.S. economy due to the
narrowing wage differential between developed and emerging
economies, strengthening of the U.S. dollar against a basket of
emerging currencies and relatively low energy prices in the U.S.
Low borrowing costs and increased availability of bank
financing are also shoring up the sector.
While there are several industrial ETFs to play the boom, FXR could
be a wise bet owing to its unique stock selection technique. This
fund follows the StrataQuant Industrials Index which is based on
the AlphaDEX stock picking methodology.
Instead of focusing solely on market cap, this technique closely
monitors the stocks' price appreciation/momentum, sales and
earnings growth as well as value factors and ranks (see
The ETF has managed assets worth $1.22 billion. In total, the
product holds 102 securities, which are not at all concentrated on
its top 10 holdings. The strategy eases out the risk quotient of
the fund. Investors have to pay 70 bps in fees and expenses which
is higher than the average expenses charged by the industrial
FXR has added 5.15% in the last one month. The product has a Zacks
ETF Rank of 1 or 'Strong Buy' rating with a 'Medium' risk outlook
Manufacturing Boom Will Benefit These 3 Industrial
Is There Any Reason to Be Worried?
Having said that, we would like to point out that though the
indexes are hitting highs, participation in the stock market is
quite low, unlike last year's bull phase. Per
, the average daily volume of the S&P 500 companies was the
six-year low last month, at about 1.8 billion shares. If this was
not enough, only 20 out of 500 companies made it to a 52-week high
on May 23 when the index hit an all-time high last month.
Also, World Bank recently reduced global growth projections for
this year. Growth for the U.S. was reduced to 2.1% from 2.8% while
slashed its forecast for 2014 from 2.8% to 2.0%. New conflict in
Iraq though not likely to push the U.S. economy out of track, will
definitely weigh on its recovery.
This suggests that investors still care for volatility. Skepticism
over valuation still rules the landscape though. The current
S&P 500 PE Ratio stands at
as of June 16 which is still a bit higher than the mean P/E of
15.51. With the U.S. economy way behind its pre-crisis level, we
have to wonder whether this bull run will continue long (read:
Volatility ETFs Crash Signaling Further
Still, we believe investors can take part in the slowing rebounding
economy through the afore-mentioned ETFs as these are solely based
on earnings estimate trend, especially considering that the trio
has so far retuned better than the
SPDR S&P 500 ETF
). But it is always better to be hawk-eyed before investing in such
a ballooning market; you never know when it bursts.
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PWRSH-DYN BLDG (PKB): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
FT-INDL/PROD (FXR): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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