So now we know. When the Fed announced a rate hike and the intention for more of the same to come yesterday, the market behaved in a manner that defied conventional wisdom but was predicted here. Stocks surged as the good news that the Fed saw the economy in good shape overshadowed the already priced in negative effects of higher interest rates.
Given that traders and investors are relentlessly focused on the good news, it seems that we are headed higher again. If that is the case, there is one question that has to be asked: Where should money go to take advantage of that?
If this is a reversal of the small correction that we saw over the last few days and we are headed to new highs, then it makes sense to concentrate on the stocks and sectors that led the brief move down. After all, they have some catching up to do now that the worries that caused that move seem to have disappeared.
That logic leads me to focus on finding a candidate in three areas: energy, airlines, and manufacturing. Investing in one company in each of those should pay off as optimism returns.
Energy, of course, has its own dynamic. The big drop in oil prices over the last few weeks has been the main driver of the drop there, but there are a couple of things that suggest that that is over. Firstly, as I laid out in this article, the drop in oil was the result of a focus on supply issues, even though the demand picture was improving quietly in the background.
If the market is now banking on significant growth in the economy despite the rate hike, that demand situation will once again become the focus, and if that is the case, the high levels of U.S. production will be seen as a positive rather than a negative.
In addition, the dollar also reacted in a somewhat counter-intuitive manner, dropping on yesterday’s news. A lower dollar is generally conducive to higher oil or, at the very least, it limits the downside to prices.
Oil’s expected recovery combined with a generally bullish stock market is good news for the big boys in the field, and especially those that have been investing in anticipation of a demand boost. One of the companies that have taken that view most aggressively is Exxon Mobil (XOM), so that stock is a logical pick in the energy sector.
There are a few potential choices among airlines. Again, the weakness in airline stocks came about as traders focused on a possible oversupply situation, a problem that will become a plus if the current anticipated economic growth arrives. Even if it doesn’t, the anticipation of better times ahead should result in some big jumps in some of the harder hit stocks over the next month or two.
My personal preference is for American Airlines (AAL). The management there has shown recently that they have a good handle on market conditions and have the routes to take advantage of that. I would say that if your preference was for a more domestically focused carrier such as Southwest (LUV), I wouldn’t put you off investing there. I just feel that if growth does come, the biggest pick up will be at the high end of fares rather than the discount carriers, making AAL a better choice.
There are also many potential investments in the manufacturing sector, but here it will pay to take note of some actions and words of the Trump administration. The President evidently sees the steel industry as indicative of the kind of decline that he ran against.
Free market types may be uneasy about the long term effects of a more nationalist policy towards trade, and there are undoubtedly holes in the order that pipelines use American steel in the future. Additionally, his words don't always sync up to action, given that despite his promises, the Keystone XL pipeline won't have to be built using U.S. steel after all.
That being said, reworking trade deals and encouraging buying at home can only be positive for U.S. Steel (X).
That stock lost around 15% in the run up to yesterday’s announcement then jumped yesterday. It does, however, still have some ground to make up and should provide a decent short to medium term return.
The evidence so far suggests that the market is shifting focus again and, after a short wobble when pessimism reigned, is back to the anticipation of stimulative fiscal policies that will more than outweigh a more cautious monetary environment. Given that, stocks that have dropped noticeably over the last few weeks - like XOM, AAL, and X - provide the best opportunities to take advantage as we push on to new highs.