There has been a strong resurgence in manufacturing over the past six months as demand for durable goods has reemerged in full force, observes Jim Stack, money manager and editor of Investech Research.
The Material sector is not overvalued and is a direct beneficiary of this recovery. Consequently, we are adding a position in the Materials Select Sector SPDR ETF (XLB) to our Model Fund Portfolio.
The technical situation has improved as post-election strength in the market also led to new highs in critical secondary indexes, including the InvesTech Bellwether Index and small-cap Russell 2000. This has resolved many of the worrisome divergences that had previously been ongoing.
Economically, the housing market is still showing no signs of slowing. Homebuilder Confidence from the NAHB reached another all-time high in this week’s report, as did home prices.
More broadly, the Leading Economic Index (LEI) rose for the sixth straight month in October. The LEI will be crucial to monitor for signs of trouble going forward as the global economy navigates through surging COVID-19 caseloads.
Overall, we see evidence that points to further stability in the market, as well as the residual risks. A key factor that bodes well for stability is the strong recovery in the fundamental and economic data, which is especially pronounced in the manufacturing sector.
Inventory levels are still being restocked, and as such, there will likely be a continuing demand that benefits stocks in the materials sector.
