Related topics: stocks, Caterpillar, BHP Billiton, Intel, Jim Jubak
"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."
I don't have the foggiest idea if Abraham Maslow, the psychologist who authored that quote in 1966, knew anything about investing.
But from painful personal experience, I'd propose an investing version that goes like this: "When you know only one group of stocks, it's tempting to see that group as the way to succeed in every market."
In 2011, I think it's going to be hard to make much money in the stock market unless you learn a new stock group, one that you're probably uncomfortable with, and one that's not the commodities or technology stocks you're familiar with from the last two huge rallies.
You're going to have to learn something about industrial and manufacturing stocks. That's the stock group you'll need in 2011 -- or at least in the first half of 2011.
Jim Jubak
(My dad told me his own version of Maslow's quote one day. As he handed me a pipe wrench, he said, "When every problem is a nail, you should use just about anything you have as a hammer." But I don't know what the investing wisdom in that might be.)
In 1999, for example, anyone who knew technology stocks hammered the stock market for about a 100% gain -- or more. Shares of Cisco Systems (CSCO, news) climbed 131% that year.
Try that in 2007, a huge rally year that was similar to 1999 in that it preceded a crash, and you would have been left crying on your router. Shares of Cisco dropped that year by about 1%. Not every technology stock did that badly in 2007. IBM (IBM, news) was up 13%. Microsoft (MSFT, news) advanced 21%. Oracle (ORCL, news) nailed 32%; Intel (INTC, news) 34%. (Microsoft publishes MSN Money.)
But compare those gains with those delivered by a different stock group. General-purpose mining stock BHP Billiton (BHP, news) was up 79% in 2007 -- and BHP Billiton was a laggard in its industry that year. Brazil's iron-ore giant Vale (VALE, news) climbed 122%. Potash of Saskatchewan (POT, news)soared 202%.
Yep. In 2007, it sure would have paid to abandon what you know -- technology stocks -- and learn an unfamiliar group -- commodity producers.
In 2011, the group you need to know is industrials. Why?
3 reasons for industrials now
First, because we're in the early recovery stage of the economic cycle. For more on why I think that and why it's important see my Jan. 27 column. In the early recovery stage, consumer sentiment improves, industrial production turns up, interest rates hit bottom, and unemployment peaks and starts to move lower. Sectors that usually do best are industrials, near the beginning of the stage; basic materials; and, near the end, energy.
Second, the actual economic numbers, as opposed to the economic theory, show that manufacturing is leading the economy at this point in the cycle. For more detail, see my post on Feb. 2. The ISM Manufacturing Index climbed to 60.8 in January from 58.5 in December. The January number was the highest since May 2004. New orders picked up to 67.8 from 62.0 in December. The order backlog index rose for the first time since August 2010, to 58.0 from 47.0 in December.
The U.S. isn't the only country with strong manufacturing activity right now. In the United Kingdom, despite a contracting economy, manufacturing grew at a record rate in January. In China, a purchasing-managers index from HSBC and Markit Economics climbed to 54.5 in January.
Third, this outperformance by manufacturing makes sense. During a recession, especially during a deep recession, companies put off any spending they can -- especially any spending that's linked to increased production capacity. Why invest in a new plant or equipment when the old stuff is running at only 60% of capacity or less?
When the turn in the economy comes -- or at least when companies are convinced that the turn is real -- they start buying. And they buy not just for their current needs, but also to make up for all the buying they postponed during the recession.
