With the Dow (^DJI) hitting record highs after the FOMC’s decision to taper an additional $10 billion a month, Yellen and the other committee members are signaling the health of the economy and our financial system are in fine shape. Whatever your thoughts on Janet Yellen and the Fed’s ability gauge the economy’s health, and despite a less than stellar Q1 GDP reading, the unanimous vote in yesterday’s policy statement means the central bank is seeing an economy that is still going in the right direction.
The logical conclusion to this train of thought is, barring any economic setbacks, investors will soon enter a post-taper world where if the trend continues, the FOMC could be done with asset purchases within the next five months.
A poor Q1 GDP report aside, if you believe in the economy is headed in the right direction for the balance of 2014, and then cyclicals are where you need to be says John Canally of LPL Financial. “We’re near the end of the business cycle, and there’s a search for growth,” he says. Cyclicals are where Canally is hunting, and with that in mind, here’s where Canally says you need to be in a post-taper world.
The housing market has recovered, but it’s still working its way back to full strength Canally notes. “End of 2011 the housing market bottomed out, things have been getting better slowly… The inventories of new and existing homes are at multi-decade lows, that should be plus for homebuilders and rates are going to stay low for a considerable period.”
“Industrials are a play on business capital spending.” They’re no longer a play on China, he says, as investors need to focus on growing infrastructure spending in the U.S. and Europe. Despite yesterday’s poor GDP report, Canally says by the end of the year we can expect to see 3% GDP growth in the U.S., and that means industrials are one of his top plays for capitalizing on an “accelerating” economy.
Canally’s last pick is an interesting one. Small caps (^RUT) have been getting picked apart lately, after nearing all-time highs earlier in April. They tend to do the best during periods of high growth, and during those times investors are more willing to take on risk for the possibility of higher returns.
The domestic focus is what Cannaly is looking at. “Small Caps generally focus on the U.S… we’re getting better job growth,” he says. “Small Caps are generally a good play on the credit cycle, they’re in the sweet spot there,” as Canally notes rates should stay low for quite some time.
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