CYCLICAL STOCKS MAY CONTINUE RALLY
Improving picture in US and globally lends confidence to investors to keep the reins
UNITED States stock sectors that are particularly dependent on economic growth recently grabbed hold of the market’s rally and are poised to keep the reins should further signs of global expansion emerge.
Such sectors, including energy, industrials and financials, beat the Standard & Poor’s (S&P) 500’s 1.9 per cent gain last month.
Those sectors had previously lagged behind the benchmark S&P, which has climbed 14 per cent this year while feasting on a steady diet of record highs.
Instead, shares of technology and healthcare companies, whose profits are more impervious to economic downcycles, have led this year’s rally.
The question for equity investors is now: Was last month just a catch-up period for the lagging, cyclical sectors, or can an economic lift support a sustained run?
“If it’s just a mean-reversion trade, then it’s probably going to last another few weeks and then we’re back to the old winners,” said Walter Todd, chief investment officer at Greenwood Capital Associates in Greenwood, South Carolina.
“If it’s something more fundamental, it should be longer lasting than that.”
A test comes this week, as third-quarter corporate earnings season kicks into high gear.
Reports from industrial conglomerates General Electric and Honeywell International, railroads CSX Corp and Kansas City Southern and steel company Nucor Corp stand to yield insight into the economy’s health.
Last month’s stock action, which included outsized gains for small-cap stocks, had echoes of the immediate aftermath of President Donald Trump’s election in November last year.
The same areas showed strength on hopes that a Republican-led federal government would push through an agenda, including tax cuts and deregulation, that juices economic growth. Those trades faded as Trump struggled to rack up any significant legislative wins.
Now, investors say, last month’s stock rally for those groups again stemmed at least in part from policy hopes, as Trump revved up his tax-reform push.
“In many ways, we began to replicate the market performance following Trump’s election,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
But an improving economic picture in the United States and globally lends confidence for the cyclical sector rally.
The Citi economic surprise index for the United States , a measure of economic data that can come in weaker or stronger than forecast, is around a five-month high, with the barometer trending higher since hitting multiyear lows this summer.
This week, the International Monetary Fund upgraded its global economic growth forecast for this year by 0.1 percentage point to 3.6 per cent, and to 3.7 per cent for next year, from its April and July outlook, driven by a pickup in trade, investment, and consumer confidence. Reuters