(By Kevin Donovan) Fortunately, the U.S. economy doesn't have a living will. Pulling the plug is not an option. Though growth may remain statistically positive, the pulse is so faint that life support is needed.
The latest setback to our patient was news on Monday that retail sales contracted 0.5% in June, the third straight month of declines in that key measure of consumption. While waiting for animal spirits to revive, we're reminded of Lenin's recipe for Bolshevik success: things may have to get worse before they get better.
But, alas, capitalists are driven to want "better" right now, so we've been cogitating on strategies to keep the investment animal alive while dreaming of the days when all you had to do was buy a bunch of stocks and watch them go up.
First, let's note that the equity market has been quite brave in the face of mounting evidence that another recession, if not here already, is imminent. Since the closing bell on June 1, when the weak May jobs report flashed trouble, the Dow Jones Industrial Average is up 5.7%, the S&P 500 has gained 6.7% and the Nasdaq Composite has added 6.0%. In the credit market, the 10-year Treasury note yields 1.48%, just above its all-time low.
We'll leave it to the big thinkers at iStock to figure out what's going on, but we suspect the resilience is an implicit expectation that the Federal Reserve will be easing policy further in the weeks ahead. With that in mind, we think three sectors could outperform this summer.
Interest-rate sensitive companies stand to benefit from central bank munificence. If the potential fallout from the LIBOR-fixing scandal scares you away from the big banks, home-building stocks could be a homerun as mortgage rates stay attractive. We like Lennar, D.R. Horton and PulteGroup. We also favor the smaller investment houses BlackRock and Lazard.
This is the "cover-two" defense of investment football. The cornerback is an attractive dividend yield vis-à-vis bonds and the safety is sales resilience in trying times. We like Safeway for its 4.40% dividend yield and the potential for margin expansion, but Kroger and Wal-Mart should be on the radar as well.
We don't know about you, but we direct whatever summertime discretionary income we can scrounge to greens fees and baseball tickets. This sporting life should get a jolt as the Summer Olympics make their quadrennial appearance later this month, providing a welcome distraction from that other quadrennial event known as the presidential campaign. We would own shares of Nike and Dick's Sporting Goods.
For more summertime ideas with a technical slant, check out our colleague Rich Bieglmeier's sector performance review series.