MoneyShow's Jim Jubak thinks it might be time to start looking at industrials that've been hit hard by the plunge in oil prices, but aren't necessarily energy companies at their core.
In the aftermath of Janet Yellen's testimony saying that interest rates are going to stay low for longer than expected, the bank is going to be patient, in the aftermath of a successful four month extension of the Greek debt crisis and anticipation of the European Central Bank's decision to buy $1 trillion euros worth of assets, the market has risen to all-time highs, not just in the United States but in London, etc., and that presents a real problem.
If we were at more moderate valuations and all these good things had happened, you would say, “Oh well, the market will move up, because we haven't anticipated those.”
What we're looking at now is a situation where it looks like the market has anticipated all of that good news, that bad news would have been a surprise, the market would had fallen, so the question is, well, okay, now where do you put your money?
There are two themes I think that are developing in this market. One is Europe versus the US on the idea that European equities are still relatively less expensive, although we've had a pretty decent move up 5% to 6% in the first part of the year so they're not as cheap as they were, but I still think you're going to see more money flowing into, it has been flowing into, more money flowing into European equities out of US stocks. That's one thing.
Second, I think you're going to see people looking at the US market and going, oh, okay, so technology stocks are up, Apple is up, consumer stocks are up, some of them anyway, so we're going to put some money—let me look at some of the industrials that have been hit fairly hard by the plunge in oil prices but that aren't necessarily centrally at their core aren't necessarily energy companies—so companies like General Electric (GE), which has exposure to the energy sector but has a lot of other businesses too or Cummins (CMI), which, again, or Caterpillar (CAT).
All of these industrials look like they've been building basis, starting to move up again, and I think they still look relatively inexpensive, especially if you believe that what you're going to see is a second half recovery in the oil and energy sector so that would push these stocks up higher. They look like better bets. I think you're going to start to see some rotation. You've already seen it in some of the hedge funds looking to sell technology and move into energy and I think the big question is how long is that going to run, is it going to turn into something that's a real strong trend as opposed to where it is now, which is sort of like, well, we see leading indicators pointing in that direction and that, I think, is a question of where we're going in the market. Europe/US cyclicals would be my guesses, right now, at the end of February.
