The Stock Market And The Economy: Seeing Strength In More Productive Areas?

by: John M. Mason


Investors, this year, are putting more money into Basic Materials and Industrials than into last year's favorites, consumer goods and consumer services.

Over the past seven years, the length of the current economic recovery, investors have not placed their bets in these areas because a lot of restructuring had to be done.

Are investors now seeing a resurgence in these areas because of the changes in management and the changes in business models that have resulted from the restructuring?

The US stock market has taken a new swing in 2016. I wrote about this in an earlier post.

The interesting thing is that investors are putting money into areas that represent a stronger production base whereas last year their emphasis was on consumer goods and consumer services.

This is with the S&P 500 Index being up only 2.1 percent from the start of the year and the Dow-Jones Industrial Average being up 5.1 percent. Year over year, both indexes are down modestly.

The top five sub-sector performers year to date are all in the Basic Materials sector. Seven of the next eight high performers are in the Industrial sector. For the relevant data on these performances, see the section called Market Laboratory in the weekly Barron's.

The top five performers are, in order of ranking, Nonferrous Metals, Coal, Gold Mining, Platinum and Precious Metals, and Steel.

The seven top performers in the Industrials area, in order of ranking, are Marine Transportation, Trucking, Commercial Vehicles, Industrial Machinery, Industrial Supplies, Building Materials and Fixtures, and Railroads.

This is a far cry from the top year-over-year performers, five of which are consumer goods producers and four provide consumer services.

In the consumer goods sector, Brewers takes the top place, then Toys, Distillers and Vintners, Tobacco and Footwear, respectively.

In the consumer services sector, is Broadline Retailers, Home Improvement Retailers, Restaurants and Bars, and Media Agencies.

The only subsector that appears in the fifteen best performers in both the year-to-date list and the year-over-year list is Building Materials and Fixtures.

Quite a shift in investor sentiment.

One can infer from this investor shift that the outlook for basic business has improved relative to the outlook for consumer goods and services.

It's not that consumer goods and services have moved into negative territory, it's just that the outlook for these other areas has increased relative to consumer goods and services.

One can make the argument that this is a good sign for the economy. A missing element in the current economic recovery is that there has been little capital investment. Look at the list of high performing sub-sectors and one can generate a little hope that the investor pickups in these areas indicate some confidence that capital investment might be picking up.

A question one can ask here is why should capital investment be picking up when the current earnings reports appear to be so bad?

I have presented the argument that the not-so-good earnings results coming out this quarter reflect a need on the part of corporations to restructure their business models and adapt to the new economic and technological environment.

One must look closer at the sub-sectors that are doing so well to investigate whether or not the companies in these sectors are farther along in the restructuring process than are the sectors not performing in the market as well.

This is something that I will be analyzing in upcoming posts.

If this is true, it would be a good sign for the economy.

One of the results observed in the current economic recovery is that labor productivity has been stagnant and that this has impacted both the employment statistics and the improvement of wages.

The sub-sectors that have performed so well this year, if they are in fact ahead of others in the restructuring process, tend to be areas where these types of changes can produce more gains in labor productivity. And, maybe this can contribute to greater employment and higher wages.

Certainly, many of the sub-sectors that have performed well over the past year are not areas that are as conducive to improvements in labor productivity. Brewers, Toys, Distillers and Vintners, Tobacco, Footwear, and Restaurants and Bars, are not areas where one ever sees much increase in labor productivity.

And, the fear in these sub-sectors is that increases in minimum wages brought on by the legal process will do more harm to employment than they will bring relief to wage earners.

The shifts that have taken place in the stock market are interesting ones and need to be followed up on. If investors are correct in their assessment, it certainly could mean a different outlook for the economy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.