Broad-based U.S. benchmarks need to pull back. Not because every adviser would like to buy the dip, but because a health-restoring correction would provide the impetus for a genuine leg higher.
Right now, the rally in U.S. equities smells like fund manager desperation. 401k dollars are pouring back into domestic stock mutual funds, forcing managers to put money to work and compelling them to keep pace with passive indexes. (Needless to say ... performance chasing rarely works out well for any party.)
What does work well? Looking to benefit from high probability outcomes.
For instance, producer prices (PPI) in January rose at the fastest pace in two years (3.6% annual). With current consumer prices only rising at 1.5% annually, producers that hold off raising prices will see profit margins diminish. And since investor willingness to buy shares is eventually connected to corporate earnings, companies will be forced to choose between passing on their input costs to consumers or risk repercussions from profit erosion.
Granted, Whirlpool (WHR) is raising prices because steel costs more. Hanes (HBI) intends to do the same due to the surge in cotton. And Kellogg (K) plans to increase cereal pricing due to the cost of grains. Nevertheless, counting on certain companies to demonstrate effective pricing power is not the way I intend to benefit. (Besides, the more companies pass on costs, the more likely it is that the Fed will need to tighten monetary policy to contain the increase in consumer price jumps.)
In my mind, then, the highest probability outcome is a “profit squeeze” for producers. However, these wholesalers or manufacturers still require the resources to make their goods. It follows that companies providing the grains to Kellogg, the metals to Whirlpool and the cotton to Hanes are in an enviable position. The same holds true for timber providers, oil and gas explorers as well as coal miners.
Indeed, as remarkable as the S&P 500 has been over the previous three months, these ETFs may be more impressive:
|Approx 3 Month %|
|Market Vectors Rare/Strategic Metals (REMX)||31.7%|
|SPDR Metals and Mining (XME)||28.3%|
|SPDR Oil and Gas Exploration/Production (XOP)||27.1%|
|Market Vectors Steel (SLX)||22.2%|
|Global X Lithium (LIT)||20.6%|
|Market Vectors Agribusiness (MOO)||17.9%|
|Claymore Global Timber (CUT)||15.8%|
|S&P 500 SPDR Trust (SPY)||14.1%|
Right now, Mr. Market doesn’t seem to be phased by the high probability of a profit squeeze. In fact, increasing inflationary pressures, harsh unemployment realities and a variety of geo-political uncertainties have done precious little to dissuade buyers of U.S. stocks. You might even call them ... unstoppable.
Unstoppable? Maybe like a runaway inflation train. And if that’s the case, we might need Denzel Washington’s help to slow the locomotive down.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.