Lately, I’ve been watching the markets and pondering the economy’s next step.  There are many debates going on right now about reflation,  stagflation, hyper-inflation, deflation, as well as those debating the shape of the recovery, if there is one.   While I contend that we are navigating uncharted waters here and any economic prognostications should be taken with a grain of salt, I am going to go out on a limb and say that we are going to experience a return to normalcy.

But what constitutes normalcy?

I hesitate to use a term such as “normalcy” when describing markets, because what is a normal market?  Most people would equate that term with some idyllic bull market where everything goes up with very little volatility.  But, as we have found over time, those are not normal markets by any means.  Thus, by a return to normalcy I mean a return to the prevailing themes that were guiding the markets before they were interrupted by the credit crunch.   Actions since may have exacerbated some of them, and slowed down others, but I contend that they will prevail:

1.  Globalization:  While many see a protectionism in our future, I haven’t seen anything that would signal that the globalization trade is off. What does this mean?  A continuation of capital flows to emerging markets countries, new markets for US Global companies, and greater competition for US Labor.  It seems that the market is betting on this.  Over the past three months, the emerging markets index has outperformed the S&P 500 by 20% and it seems to me that we are picking up right where we left off, frontier markets.   I’m not saying that is the trade to make, but rather that it was the trade before the crisis hit, and appears to be picking up again.

2. Commodities Bull Market – Before the crisis hit we were in the middle of enormous commodity bull market.  Take a look at major commodities over the past month as well as oil and material stocks to see what the market thinks about this.  Once again this theme may not HOLD UP, but it seems to be picking up again.

3. Infrastructure – Back in 2006 and 2007, the global infrastructure play was all the rage.  This ties into both commodities and globalization and appears to be hot as ever.  Look at the performance of MDR compared with the S&P to see what the market thinks about this.