Just as fears of widespread Ebola virus swarmed the stock market earlier this month, the acceptance that the illness might be contained has returned the market to its previous levels. Put simply, stocks fell 6% in the first two weeks of October and then rallied 6% over the last two weeks.

This type of zig-zag recovery masks a market that is really flat overall. After the volatility, when the smoke clears, we are right back where we started.  It will be difficult for the market to push too much higher after this latest advance. We are still in a “long dry road”, which is a metaphor for a begrudgingly slow advance for stocks. We are also in a very slow economy with considerable economic headwinds throughout the rest of the world.

The brightest opportunities for investment appear in the industrial sector of the stock market. Other areas don’t look nearly as attractive.  Consumer spending is likely to be muted. Job growth and wage increases are barely happening according to most recent data. The principal engine of retailing, Amazon, reported disappointing sales this month. This suggests many consumer related companies will see little progress in their stocks. In addition, financial companies face headwinds from low credit spreads. Social stocks and story-stocks like Tesla have already been played out and investors have been setting expectations too high.

The industrial sector, instead, retains considerable value based on the business outlook for these companies. Companies like Cummins, Chicago Bridge and Iron, Eaton, Parker Hannifin, Paccar, and United Technologies are representative of these companies. We plan to add to our holdings in these stocks.

Overall, we plan for a flat market for the remainder of this year. This will emphasize stock and sector selection in order to make solid gains in the fourth quarter.

Posted by Dan Botti at 3:15 PM No comments: