Every time I see an adult on a bicycle I no longer despair for the future of the human race.”
— H. G. Wells
Economic Perspective
The long U. S. industrial decline may be reversing. In March, manufacturing expanded for the fifty-sixth consecutive month. Manufacturing’s share of GDP has ended a forty year decline, recording its biggest gain in fifty years in 2012. Familiar names like Caterpillar, Ford and NCR are moving some operations back to the United States. Even Apple is building a small manufacturing facility domestically. However, the improvement primarily reflects increases in manufacturing productivity rather than employment growth.
Three trends are fuelling the manufacturing resurgence. First, the cost advantages of outsourcing factory work are narrowing with foreign wage levels rising in the developing world. Second, a weakening of the dollar makes U. S. goods more attractive abroad. And, third, booming domestic energy production, especially of natural gas, helps U. S. steel fabricators, transportation equipment and machinery manufacturers, and petrochemicals. (Natural gas is a feedstock for many chemicals.)
Further bolstering domestic economic growth is a revival in the housing market and improving consumer sentiment. March retail spending growth was the highest in months. Through large monthly bond purchases and historically low interest rates, the Federal Reserve, under new Chair Janet Yellen, will continue to nurture these nascent trends.
Market Thoughts
With heightened volatility from 2013 levels, the US stock market is back to reactive trading buffeted by the favorability (or lack thereof) of economic reports. Investors feel the pain of losses more intensely than the pleasure of gains. In 2013, investors added to US equity mutual funds for the first year since 2008. Yet, continued mistrust of stocks ensures a proverbial “wall of worry” that stock prices climb in a bull market.
The year opened with a downward spike in stock prices. Increased purchases of domestic stock mutual funds signal the return of the individual investor. Yet investors remain skittish; one bad economic statistic and the stock market drops abruptly. Last year’s sharp advance in stock prices elicited shouts of: “Bubble!” In general, stocks remain fairly priced, but high growth technology and biotech stock prices have temporarily galloped ahead of their business prospects. In March, Russia’s Vladimir Putin inserted himself as the principal threat to global security and securities markets.
In an effort to navigate the challenging equity markets, we emphasize sectors like: consumer staples (Church & Dwight, Nestle); manufacturers (Colfax, Deere, ITW, Wabtec); medical equipment makers and pharmaceuticals (Bristol Myers, Covidien, Johnson & Johnson, Pfizer); entertainment (Comcast, Disney, Liberty Global, Time Warner); selected technology (Qualcomm, Xylem); insurance (Alleghany, Allied World, White Mountain); and, dividend plays like Digital Realty (data centers) and ONEOK Partners (energy pipelines).
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Bache Capital Management, an independent investment advisory firm, is committed to safeguarding the confidential information of its clients. We hold all personal information provided to our firm in the strictest confidence. These records include all personal information that we collect from you or receive from other firms in connection with any of the financial services provided by Bache Capital Management. We also require other firms with whom we deal to restrict the use of your information. A complete privacy statement concerning our firm’s policy is available upon request. If you did not receive and return a confirmation of this policy, please contact us.
Proxy Voting Policy
Another reminder, with the exception of time sensitive reorganization transactions like mergers and acquisitions, the firm does not vote proxies on behalf of clients.
Stephen K. Bache, CFA
Sources: BloombergBusinessweek, The Economist, New York Times, The Wall Street Journal, The New Yorker; Simon Winder, Danubia
