After much talk about an impending recession, we are back in a roaring bull market. The final leg higher in stocks – which has pushed the benchmark indices to record – makes some collapsed stocks attractive again and prompts investors to buy cyclical stocks that are closely linked to the performance of the economy.
But despite this euphoria caused by some improvements in trade negotiations between the US and China, it is not yet clear how sustainable that reversal will be and whether we can comfortably reach a bottom in cyclical stocks, such as industry.
In an economy where the remains are at a historically low level and the central bank is ready to cut, there are still some signs of trouble on the horizon.
The US trade department, for example, reported last Friday that it was unable to recover in October after a weak reading in September. That was the reason for JPMorgan Chase & Co. to lower its estimate for the fourth quarter from 1.25% on an annual basis to 1.25%.
On the US and China front, the news flow is certainly positive and it is possible that both countries will soon conclude the first phase of their trade agreement. But in our opinion it is still risky to build up too much excitement around these conversations. Both countries continue to send conflicting signals and very little information is available to conclude that everything is going well.
While negotiators on the weekend & # 39; constructive discussions & # 39; CNBC reported Monday that China is pessimistic about reaching a deal because of US President Donald Trump's reluctance to roll back existing rates.
First sign of problems
Despite these concerns, the current stock market rally shows that this time investors are almost certain that there will be a positive outcome that will stimulate growth and pave the way for companies to achieve their 2020 earnings estimates.
When the trade war escalated early this year, investors avoided cyclical companies. But that trend is changing rapidly and many of these sectors are now performing better than the current ones. The, for example, posted a 26% year-to-date gain compared to the 24% increase in S&P 500. The S&P 500 industrial sector also outperformed the wider market, up to 28% so far.
If you are skeptical about this one-sided market image, then it is a cautious strategy not to get too excited and to buy shares that will quickly give up their profits at the first sign of trouble.
Shares of 3M Company (NYSE :), one of & # 39; the world's largest industrial conglomerates, is an example of a stock that we recommend avoiding while the recovery remains on shaky ground. The share has recovered by 13% since the beginning of October. However, it fell 1.7% yesterday to $ 167.77.
The Minnesota-based maker of things, from post-its to air filters and touch screens, reduced his and expected revenue for 2019 last month, with Michael Roman, Chief Executive Officer, a & # 39; challenging & # 39; macroeconomic environment. This weakness was widely supported, suggesting that the demand for its industrial products is being hit from all directions.
The shares of the powerful maker of mining and construction equipment, Caterpillar Inc (NYSE 🙂 also experienced a strong recovery since the beginning of October and increased by more than 20%. The stock slipped in the last three sessions and dropped 1.2% yesterday to end the day at $ 141.52.
UBS has downgraded Caterpillar shares in a recent note, saying that more than half of the company's end markets will "peak" in 2019, "put sales and margins under pressure in 2020 if demand falls."
Caterpillar Weekly Price Chart
Caterpillar's weak prospects, considered an economic bellwether, are in line with the latest global economic forecasts from the IMF and the OECD. Both institutions lowered their forecasts for major economies in 2019 amid geopolitical and trade tensions.
Bottom Line
The recent evidence of strength in US markets is mainly fueled by interest rate expectations and hopes that the trade dispute with China will be resolved. Despite these positive developments, it is not a & # 39; comprehensive & # 39; scenario and there are still a lot of risks lurking. In this uncertain situation, it is better not to buy shares that have proven to be too risky and volatile, such as 3M and Caterpillar.
