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Wednesday, April 23, 2014 - 12:45
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Wednesday, April 23, 2014 - 12:45

The Economy Is Finally Approaching Lift-Off -- 4 Sectors To Target

Wednesday, April 23, 2014 2:30 PM

If you live in Southern California and look out on the horizon, you may notice a lot of cargo ships along the coastline these days.

According to the Port of Los Angeles, the volume of goods being shipped in (measured by container volumes) rose 41% in March. The volume of goods being shipped out rose an also impressive 22% from a year ago. On a combined import/export basis, that marks the sharpest year-over-year monthly gain since 2007.

This surge in port traffic helps explain a view of the economy that is starting to spread. Economic activity stalled over the winter, thanks in large part to the "polar vortex," but came roaring back to life as the quarter came to an end. We also know that trade and economic activity are strengthening by looking at the Dow Jones Transportation Index (DJT) which just hit a new all-time high, and when paired with peaks in the Dow Jones Industrial Average, is seen as a bullish sign, according to the Dow Theory.

We will hear more about the pace of economic growth on April 30, when first-quarter GDP growth rates are announced. The headline number will look pretty weak, perhaps close to 1%, but that really reflects the very slow start to the quarter.

That surging level of exports and imports noted earlier should get your attention: A wide variety of companies have been waiting for global trade activity to rebound before stepping up their own pace of investments. According a survey conducted by the Business Roundtable, "More than 70% said that expanded U.S. trade opportunities would have a positive effect on their businesses, with 42% saying they would hire additional employees if global trade expanded."

Chief financial officers, which are tasked with making key decisions regarding capital spending and hiring, follow a series of economic reports to gauge the economy health, and perhaps the most important report is the Conference Board's Leading Economic Index (LEI). The LEI comprises 10 forward-looking data points, and this broad measure is now building a head of steam, rising 0.8 to 100.9 in March.

The Conference Board's key takeaway: "After a winter pause, the leading indicators are gaining momentum and economic growth is gaining traction."

Still, many investors may have an unpleasant sense of déjà vu. The U.S. economy showed impressive signs of life in the summer of 2010 and again in the autumn of 2011 only to cool off again in subsequent quarters. So it's fair to wonder if this apparent rebound that took root last month is just another head fake. To invoke a tired cliché, this time is different.

That view stems from the fact that the U.S. employment picture, which is much stronger than it was a few years ago. According to the federal Bureau of Labor Statistics, more than 7 million have been pulled into the workforce since 2010, and we're just one or two job reports away from reaching the 138.3 million who were employed back in January 2008, before the economy cratered.

In effect, a lot of slack in the labor force is beginning to be taken up, which sets the stage for long-awaited growth in wages. And more money in consumers' pockets is just what the economy needs. As I noted a few weeks ago, a monthly survey of small businesses found that "a net 23% of surveyed employers boosted employees' salaries, which is the strongest showing since 2008."

As noted in that column, that trend should call your attention to consumer discretionary stocks. The wage gains and improvements in trade activity also point to upside for three other sectors: staffing, retail and industrials.

The Rise Of The Headhunters And Temp Staffers
Corporate recruiters are the canary in the economy's coal mine. Their phones start ringing as companies start to add to staff. They also start filling more openings as vacancies are created by newly confident employees who begin to job-hop again in search of higher salaries and greater career growth.

My favorite employment-related stock remains Monster Worldwide (NYSE: MWW), especially after a 20% pullback from its March 52-week high. Then again, LinkedIn (NYSE: LNKD) has also begun to hold great appeal after an even sharper plunge in recent months. If you're focusing on temp staffing firms, then check out Kelly Services (Nasdaq: KELYA), which typically traded in the $25 to $35 range before the 2008 economic crisis and now trades closer to $20.

The Retail Rebound
Investors will also likely hear about an upturn in spending in retail as the quarter came to an end, reversing dismal consumption patterns seen in the winter. Still it's wise to track retail sales for a bit longer before jumping into retail stocks. The recent rebound in gasoline prices may start to blunt some discretionary spending.

I'm tracking the teen-focused retailers to see how their merchandising strategies are faring. Teens have had a very hard time landing summer jobs in recent years, which has really hurt this category, but the firming economy could signal a much better summer season for teen employment and spending trends this year.

Lastly, the rebound in global trade and capital spending plays right into the hands of industrial firms. Many of which still trade for less than 12 times forward earnings. I'll be looking more closely at this group in a future column, but investors should also consider industrial exchange-traded funds (ETFs). My colleague Jim Woods recently profiled the Industrial Select Sector SPDR ETF (NYSE: XLI), though similar offerings from iShares (iShares US Industrials ETF (NYSE: IYJ) and Vanguard (Vanguard Industrials ETF (NYSE: VIS) are equally suitable.

Risks to Consider: The late quarter rebound is partially due to inventory restocking after the polar vortex, and it's always wise to see several months' worth of economic data points to confirm that a sustainable economic rebound is underway.

Action to Take --> This is not a tacit endorsement to buy all stocks. Recent market action highlights a clear preference for value over growth, and some of the most richly valued stocks in the market are unlikely to revisit their 52-week highs anytime soon. Still, sectors that focus on retail spending, export activity, capital spending and staffing represent the value tilt. That makes this a great time to shift your portfolio toward them.

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David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.