The following is an excerpt from Zacks Chief Strategist John Blank’s full Oct Market Strategy report To access the full PDF, click here
Let’s cover the entire waterfront in this month’s Zacks Market Strategy summary.
What’s my reasoning for doing that?
There exist a very wide range of themes underpinning this market’s trading, going forward.
Reflecting on how they may intertwine in the near future would be a great help.
A. What Do I Think of the U.S.-Mexico-Canada trade deal (USMC)?
The details are all quite reasonable and do-able. I expect it will be ratified.
I noted Dow Industrial type stocks jumped on the news. I doubt the U.S. stock markets digest this directly, long-term. But it is bullish, as it reduces the uncertainty caused by the idea of destroying NAFTA.
Much of the trade negotiation detail was in the Trans-Pacific Partnership (TPP) agreement ripped up in the early days of the new administration.
Along with signs of a formal agreement by Japan, Europe and the U.S. to start to address ‘a third party’ (aka China) directly, we have the outlines of what is going on.
This new Canada-Mexico-USA trade deal -- and the 3-region agreement to address China -- is basically the TPP plus Europe (without calling it that). Fortress North America is born.
Having written that, any deal with the Chinese – precipitated by this strategy –may be 10 years off.
B. Is it time to buy non-U.S. stocks?
What to make of the basic problem(s)?
Under heavy stimulus, U.S. growth gets hotter, just as non-U.S. growth gets a weaker pulse.
That dynamic needs to change first.
Only then should investors begin to “Overweight” international indexes.
C. What does the Fed note as a source of fragility?
As credit has expanded relative to the size of the economy, banks have increasingly had to rely on wholesale funding relative to their deposit base.
This is a source of fragility.
Wholesale funding is highly runnable, meaning that large pools of funds can vanish overnight, thereby leaving banks in search of liquidity and making the financial system more vulnerable.
D. Zacks October Sector/Industry/Company Telescope
October shows us a domestic cyclical lift is in play.
There is oddly also a strong set of signals (Railroads, Trucking and Energy) that the global manufacturing economy is doing fine too. Contrarians should make note of this.
a) Railroads & Trucking stayed hot
b) Energy is back to an Attractive play, with WTI oil prices breaking $70 a barrel now
c) The Obamacare HMO play is still very much alive too
d) There is an obvious trade war loser now. It is Consumer Staples
(1) Industrials rise to Very Attractive. The very best is Pollution Control and Business Products. Railroads & Trucking are strong too.
Top Stock: Donaldson Company (DCI - Free Report)
Donaldson Company, Inc. is a leading worldwide provider of filtration systems and replacement parts.
(3) Energy is now Attractive. The leader is Coal and Oil & Gas Integrated.
Top Stock: CONSOL Coal ((CCR - Free Report) )
CONSOL Coal Resources LP manages and develops active thermal coal operations. The company engages in underground mines and related infrastructure that produce high- BTU bituminous thermal coal. It primarily sells its coal to electric utilities in the United States.
CONSOL Coal Resources LP, formerly known as CNX Coal Resources, is based in Canonsburg, Pennsylvania.
(4) Info Tech is back to Attractive. But the leader is Computer-Office Equipment. Semis are now Market Weight.
Top Stock: Aspen Technology ((AZPN - Free Report) )
Aspen Technology Inc. is a recognized expert and leading provider of award-winning asset optimization software and services.
AspenTech's integrated aspenONE solutions enable manufacturers to reduce costs, increase capacity and optimize operational performance end-to-end throughout the engineering, plant operations and supply chain management processes, resulting in millions of dollars in cost savings.
(5) Consumer Discretionary falls back to Unattractive. The best of the bunch is Apparel. But Non-Food Retail, Home Furnishing - Appliances (trade war price rises?) and Leisure Services look poor.
(6) Financials are a Market Weight. The leader is the cyclical Insurance industry, which is still overlooking any Hurricane Florence costs.
(7) Materials are Market Weight. The leaders are Paper and Steel.
(8) The new Communications Services group (replacing Telcos) is a Market Weight.
(9) Utilities are a Market Weight.
(10) Consumer Staples stays Very Unattractive. But there is one glaring exception in October. Agri-business is a Very Attractive industry.