As we are coming out of the recession, we are looking at the cyclical sectors for growth. We have slowly increased our weightings in Industrials, and are now almost 5% overweight compared to the S&P 500. We feel there are good values within the sector. We believe that money has been freed up and that projects that were once stalled have been brought back online in companies like General Electric (NYSE: GE), Fluor Corp. (NYSE: FLR) and even Boeing Company (NYSE: BA). We think with projects starting up that the Industrials sector will see some growth.
We have also found Technology to be our new defensive growth go-to sector. Stocks in this sector have shown stable earnings and that has been reflected in their stock prices of core companies like International Business Machines (NYSE: IBM), Microsoft Corporation (NASDAQ: MSFT) and to a lesser extent, Intel Corporation (NASDAQ: INTC). Of course, there is also Apple Corporation, (NASDAQ: AAPL). We find that analysts are near tripping over themselves trying to value Apple because they have a strong product line.
We see Technology as a defensive position because large corporations have cash. If you look back to the early 2000s, earnings volatility was higher, and many companies overspent. For a long time, companies’ capital spending budgets were uncertain. Now corporations have cash, and we have explained what companies can do with cash and credit: pay dividends, buy other companies or make themselves more efficient. One solid way to improve operations and efficiency is to buy technology.
Even smaller companies will embrace technology if it will save money over the long run. This is not something a small company will do if they know they will have to tighten their belt to weather a recession. Companies are embracing technology products to take advantage of the new technology, i.e., video on demand, online conferencing, etc.
In the S&P 500 Index, stocks are generally selling for about 9 to 10 times earnings. Some companies like Intel are growing faster than that and paying near 3% to 4% in dividends. Yet we still see people not investing because they are not comfortable with volatility—mostly because they have not had to deal with volatility.
Consider some of our past bear markets: 1966 down 25%; 1968 down 36%; 1973 down 45%; 1976 down 27%; 1981 down 24%, and 1987 down 36%. Then we went until 2000 when it was down 49% and again in 2007 down 57%. Those who only began investing in the last 20 years or so are very uncomfortable with volatility.
Those who sold out of the market a year and a half ago are still scared. The market goes back up 10%, and they still do not want to get back in. The market continues to go up 15%, 20%, then 30%. As the market reached 40% growth, they reluctantly realize they made a mistake getting out and not buying when the prices were low at the bottom. The market could have continued to go down. There is risk that comes with your reward, but if you have a 10 to 20 year time horizon. With that time horizon, now is the time to be buying, and you should be able to wait out a downturn.
Economic momentum is not easily stopped. Expansions take nearly six times as long as a contraction. Our economy can not add 8 million jobs in the next year. However, we still feel that we are in position for solid, moderate growth ahead.