Economies go in cycles. They push to their breaking points, then move in the opposite direction. We saw it clearly in the 90's when there was no end to up (except there was and we abruptly hit it in 2000). In 2008, it felt like there was no end to down. But we now know there is. Things are picking up, and there are numbers to prove it.
Don't be the last to figure out we're in an economic recovery. Sitting on the sidelines, waiting for one more chance to buy a stock at the bargain price you saw in March of 2009 isn't going to happen. Times have changed. The U.S. economy is on the mend.
Why else would Ford (F) announce it wants to hire over 7000 worker in the next 2 years? It sees demand for cars. Those laid off workers for the last 3 years can come back. They're needed again. This time, however, it will be with a different wage package, one that reflects more the reality of today's economy. That means better chances of higher profitability. GM (GM) announced it's hiring as well. And with its re-emergence from bankruptcy very fresh, its pay packages won't be nearly as generous as they were. Nissan (NSANY) is going to start building the Rogue small SUV in the U.S. because the yen is so strong. That's more jobs.
Investors believe these companies are not only going to make it, but they're going to make lots of money. Why else would Ford be hitting new 52 week highs, breaking through $18 a share when last year in June it was trading at $9.75. That's almost a double in a little over 6 months. GM came out of bankruptcy, issued stock at $33 a share, and now it trades at $39. The IPO was in November. In 2 months, investors made 18% on their money.
Stocks, in general, have had a very good run of late. The Dow Jones Industrial Average, in late June was at 9614. Now it's showing 11,697 at this writing. That's up 21.66%. In six months.
Investors don't pour money into stocks unless they're optimistic, more convinced that earnings are going up than down. They don't buy car companies that were bankrupt unless they see real improvements, both in products and management. They don't invest in the banking sector that was almost totally broken unless they know regulations are tighter, that loans are better, that profits are returning.
When you look at broad averages, you have to say that investors are bullish. All the indexes are higher. Now, the question is: have you already missed the party? Can stocks keep going up?
They can if the last part of the puzzle falls into place: the housing market. Without the housing market participating, the economic recovery will move through sectors without lifting all of them. In the latest economic report on where employment is, it showed that new hires were in railroad conductors, logging workers and metal workers. Each represents a very different sector in the economy. Where jobless rates were higher was in construction laborers and roofers. Directly related to the housing industry.
Housing has a strong ripple effect in the economy that it has to do well in order for all sectors to show improvement. When new houses are built, demand for materials for buidling them goes up, but so does the need for washers and dryers, furniture, landscaping, outdoor machinery for upkeep, barbecues, shades, pools, etc. It is a major driver of many ancillary goods and services. Without the housing industry rebounding, the economy can't be at full productivity.
That suggests that there is still time for this stock market to do better. The most recent report from Lennar Corp. (LEN), a large homebuilder, states that management sees the housing recovery inconsistent and uneven, but that early signs of stabilization are evident in some markets. In other words, the worst is most likely over. The company reported a profit, higher than what Wall Street expected, and analysts raised their recommendations on the stock to a Buy. So unless there's an exogenous shock to interest rates or housing, expect better times ahead for most homebuilders who made it through to this point.
All of this suggests that investors can still make money in this stock market. Home builders are certainly worth investigating, ones like Pulte Homes (PHM), Lennar Corp., Toll Brothers (TOL), and Beazer Homes (BZH) are some of the largest. Investors can also spend worthwhile time in stocks that have done well in a bad economy, with anticipation of them doing even better when the economy is running on all cylinders. Stocks like Hewlett-Packard (HPQ), IBM (IBM), Intel (INTC), Cisco (CSCO), Procter & Gamble (PG), Apple (AAPL), Ametek (AME) , GlaxoSmithkline (GSK), DuPont (DD), all come to mind. For more aggressive investors, look into Knology (KNOL), Dana Holdings (DAN), Tata Motors (TTM), and NN, Inc. (NNBR).
Economies run in cycles. But there are also pendulums swinging in stocks. Now the pendulum is starting to swing upward again, moving toward more employment and higher spending. It's no where near the top of this swing. And it's not too late to get onboard.
- Ted Allrich
January 11, 2011