Industrial
Metals A Leading Indicator?
Wow, what a difference a month makes! Well, maybe two months.
As of today, the stock market is up 15.7% from the February 11 low, a surprisingly
strong rebound in a short period. Looking back at the fundamental data earlier
in the year, we were perplexed why the market sold off so sharply as there
seemed to be no significant changes in economic fundamentals that would warrant
such a sell off. Investors now appear to be more sanguine about the outlook for
the global economy and the risk of a global deflationary spiral. The Federal
Reserve recently reiterated its stance on taking a very gradual approach in
raising interest rates, and recent data out of China indicate the measures it
is taking to shore up growth could be more effective. All that makes investors
happy and more willing to put money into stocks.
From a sector perspective, it is interesting that cyclical
and industrial stocks have been leading the charge on the upside in this recent
rally. For example, industrial metals stocks (copper, steel, aluminum, nickel)
have been vastly outperforming the broad indexes as reflected in the XME, the
S&P500 metals and mining ETF, which is up 59% since the February 11 low.
Historically, rising industrial metals prices have been an early indicator of
an improving economy and we think the strong move in the XME may be telling us
that economic growth may be poised to accelerate. The strong move in this ETF
has also been accompanied by significant weakness in the U.S. dollar, rising
oil prices, and a jump in international freight rates. All these indicators
look similar to what one might observe coming out of a recession. I think it is
safe to say that the oil industry and certain industrial sectors have gone
through a recession over the past year. We saw something like this, although
more severe, in the early 1980s just before the stock market entered a strong
bull market that lasted five years. Could this happen again? Quite possibly, as
we believe the U.S. stock market remains in a secular bull market (i.e. a bull
market lasting on average 15-20 years).
So what does this have to do with financial planning? From
our perspective, it is an important element of the work we do for our clients
in helping them achieve the objectives of their financial plans. Our investment
committee considers fundamental and economic factors every quarter when we
assess the investment allocations and securities holdings within our client
accounts. At our most recent investment strategy meeting at the end of March,
we added a position in the XME within our natural resource holdings because we
felt if offered a way to enhance the growth of our clients’ assets. In previous
quarters, we’ve done this in other sectors such as health care, technology,
forest products, and housing. If we identify a sector that we believe offers
significant value, as we do with XME, we can find ways to add that within our
diversified structure to enhance returns to clients and enhance the overall
value we bring to our clients.
Bob Toomey, CFA®/CFP®, Vice President, Research
