While a
weak employment report last Friday (April 4, 2008) seems to confirm the U.S.
economy is in the early stages of a recession, investors that are looking at
the longer term are already thinking about which stocks will work best for a
recovery.
Many are
saying that the future might be brightest for one of the worst performing
sectors this year – technology – and one of the best – energy. And they’re also
finding things to like about health-care stocks.
Although
worries about the economy still loom over the stock market, there were hopeful
signs last week as the Dow Jones soared nearly 400 points on Tuesday, April 4.
The 8th largest gain for the Dow in it’s history.
Still, this
month could be challenging as companies report first-quarter earnings and issue
their expectations for the rest of the year. Many on Wall Street believe that
earnings expectations for the second half of 2008, with forcasts of
double-digit percentage growth, are too high and the U.S. market remains
vulnerable to disappoint if those forecasts don’t materialize.
Some had
been looking to financials to help lead the stock market out of it’s downturn.
While stability in bank and brokerage stocks may be necessary for the market to
head higher, the kind of earnings growth that powered strong returns on
financials in recent years now appears to have been driven by borrowing and
moving certain assets off their balance sheets.
With the
severity of the credit crunch and a downturn in consumers ability to spend, a
steady flow of good news that would fuel a sustained rally may be in short
supply for months.
But the
steps taken by the U.S. Treasury and Federal Reserve to stabilize the financial
system have some investors thinking that the worst of the selloff could be
over. They were encouraged by the market’s calm response to last Friday’s,
April 4, employment report showing a loss of 80,000 jobs in March 2008.
Technology
companies are at the top of the list of many Fund managers. The sector that was
expected to be strong this year, is down 15% since the S&P 500 hit it’s
all-time high in October 2007, making it among the worst performers of the
indexe’s 10 sectors.
Tech
companies have been hit way too hard. The reason behind this is suspected to be
in investors thinking back to the last recession when holding tech stocks was
the worst possible strategy. But the market shouldn’t underestimate the profit
growth this sector can generate over the longer term. Techs could miss
expectations this year, but not for the next 2 -3 years!
One factor
for the recent selloff of tech stocks is that financial companies traditionally
are big buyers of new technology and their ability to spend might be
compromised by their losses from the credit crunch and the economic slowdown.
And talking
about health-care stocks. Some Fund managers are shying away from the big
pharmaceutical companies that face the continuing problem of big drug products
losing their patent protection. Instead, these Funds are taking a liking in biotechnology
or medical equipment makers because whether it’s fixing the eyes, the knees or
fixing hearts, there’s always going to be a tailwind from an aging population.
Yours in
Successful Trading,
Ricky
Schmidt
www.stockbreakthroughs.com