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For almost three years, manufacturing has been the bright spot of the U.S. economy, driven by favorable government policies (e.g., cash for clunkers) in the U.S. and Europe, a falling dollar, and a resumption of growth in emerging markets.

Recently, however, this manufacturing renaissance seems to fade away, as favorable government policies have run their course, the dollar has been stabilizing, and emerging markets have been slowing down — this morning’s weak Empire State Manufacturing Index report confirms this trend.

A slow-down in manufacturing is certainly not good news for the entire U.S. economy, as it will kill a source of job creation at a time the economy needs it the most; and eventually take its toll on the already depressed consumer psychology. What does it mean for investors?

1. Stay away from energy, materials stocks, and precious metals — that are most sensitive to a slowing U.S. economy like Oil Holders (OIH), U.S. Steel (X) Walter Energy (WLT) that missed on second quarter revenues by a great margin. Cliffs Natural Resources (CLF); iShares silver trust (SLV), SPDR Gold Shares (GLD), and Freeport-McMoRan Copper and Gold (FCX).

2. Avoid momentum stocks — as investor momentum fades together with economic momentum — that’s the lesson from the performance of the momentum stocks of late 1990s and early 2000s like Cisco Systems (CSCO), Ciena Corp (CIEN), JDS Uniphase Corp (JDSU), Corning, Inc. and Ariba Inc. (ARBA). This means that investors should stay away from today’s momentum stocks like Netflix, Inc. (NFLX), Open Table Inc. (OPEN), and LinkedIn Corp (LNKD).

3. Buy non-cyclical stocks — stocks that fare better during a recession like food and beverage, but stay away from medical providers like nursing home companies, which are expected to be negatively affected by deficit cuts, as discussed in a previous piece.

4. Buy U.S. Treasuries -- and Treasury ETFs like TLT. U.S. Treasuries are the first investment to come in mind when the economy heads into a slow-down or even an outright recession. But investors should be cautious as yields are already near record low levels, and the U.S. government debt is still under the watch of credit rating agencies.

Source: A Slow-Down In U.S. Manufacturing Isn't A Good Sign For Wall Street