This column was originally published on Street Insight on Nov. 28 at 11:20 a.m. ET. It's being republished as a bonus for TheStreet.com and RealMoney.com readers. For more information about subscribing to Street Insight, please click here.
You can call it profit-taking, a pause that refreshes or any other euphemism for the ugly action we've seen recently. What I see underneath the action is a barely discernable rotation into defensive stocks, no doubt in response to economic data that continue to come in very weak, especially on the industrial side of the economy.
I am still bullish on the economy, but I believe it's prudent to diversify with stocks that can withstand slower economic growth ahead. Later in this column I'll name some names.
But the big picture first: With so many investors looking over the current valley of economic weakness to better times ahead -- as measured by the huge market run since the summer lows -- this market needs some better economic news.
While a weak dollar is not necessarily a bad thing, it does make it a tad more difficult for the
to cut rates next year. That's what everyone is counting on, especially the financial sector, which was counting on the yield curve growing more normal, not more inverted.
For the most part, there is a lot to like in equities. However, I believe caution is warranted. Increasing defensive holdings might not be such a bad idea at this juncture, especially those that will benefit from a weaker dollar.
The most recent durable-goods data were darn ugly, with orders, excluding transportation, down 1.7%. That was significantly lower than the 0.2% gain economists were forecasting.
Unfortunately, this is merely the latest in a string of weak economic numbers. In early November, the ISM manufacturing survey came in at 51.2, below expectations and barely showing growth. In other releases, factory orders were weak, as were industrial production, housing starts, building permits and payrolls. Adding insult to injury, recent readings indicate that non-farm productivity gains have stalled.
It's Not All Bad
Of course, the numbers aren't all bad. The ISM non-manufacturing index was better than expected, and many consider that reading to be more important than its industrial counterpart, given the importance of the service sector to the U.S. economy.
Inflation numbers also continue to show that the inflation threat has diminished greatly. This has been corroborated not only by the consumer price index and producer price index readings but by the inflation components of the two ISM reports. Bond investors have also signaled that inflation is well under control -- despite the hawkish jawboning by the
-- via both the fall in absolute yields and the narrowing of the spread between nominal Treasury yields and the yields of the inflation-protected securities (TIPS).
The recent fall in energy prices has a lot to do with the fall in inflation readings and inflation expectations, and that has led to an increase in consumer confidence, the latest weaker-than-expected number notwithstanding. Retail sales were better than expected in September, but on the negative side, they were really nothing to write home about in October.
In summary, things are not all that bad in the economy. The real question, in my mind, is just how damaging the currently weak housing market will be to the rest of the economy. Put simply, sector dislocations often take time to fully play out.
For my part, I am a bottoms-up investor, so I will continue to hold stocks like
St. Paul Travelers
American International Group
. While everything is economically sensitive to some degree, these stocks are currently enjoying earnings growth that will hold up even with a weaker economy. These growth stories continue to be underappreciated by investors, in my view.
But I do have a generous portion of defensive holdings. For example, I own
Procter & Gamble
Johnson & Johnson
. I group these stocks together because they are weak-dollar beneficiaries, but stocks such as
also offer appealing defensive growth opportunities
Other defensive holdings that are currently priced attractively because of investor fear are
At the time of publication, Bagley was long Apple, Boeing, St. Paul Travelers, AIG, Procter & Gamble, Johnson & Johnson, Pfizer, GlaxoSmithKline, Duke Energy, Dean Foods, UnitedHealth and Caremark RX, although holdings can change at any time.
Jeffrey Bagley, CFA, is a portfolio manager for McCabe Capital Managers, Ltd. Bagley received a master's of business administration in finance from Fordham University and a bachelor's of science in business economics from the State University of New York at Oneonta. Disclosed holdings may change at any time without notice. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Bagley appreciates your feedback;
to send him an email.
The information published in this article is for general information purposes only and Mr. Bagley expressly does not assume any fiduciary relationship or obligations arising from membership to this website. The information presented in this article is not a personalized recommendation or individual investment advice to buy, sell, or hold any investment or security of any kind. The trades recommended by Mr. Bagley may not necessarily constitute appropriate investments for you. You should consult your own financial adviser. Mr. Bagley's articles are based on his personal research and opinions, news and financial data available in the public domain, or other sources that are considered to be reliable, but cannot be guaranteed to be accurate or complete. As Mr. Bagley or his clients may currently be holding, or selling short, securities that are mentioned on this website, he or his clients may financially benefit from any increase or decrease in share value that the public disclosure of his opinions or analysis may generate. Mr. Bagley reserves the right to purchase or sell any security at any time without any prior notice or update on this website. Such trades may even be contrary to previous recommendations. Mr. Bagley also reserves the right not to disclose all of his investments or proprietary analysis.