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The stock market is showing hints of a happier future. Stocks are no longer plummeting on every bit of bad news. And we believe that the market is poised for a turnaround in anticipation of improvement in the economy later this year and next.
But economic recovery will be slow, with a year or more of only sluggish growth. And bad news will still slam stocks from time to time, as it just did with General Electric. So tread cautiously as you buy. As Jeremy Grantham, chairman of GMO LLC, notes, the extent of the damage to the financial system remains an unknown risk.
If you're moving cash back to stocks, do so in steps via dollar-cost averaging. Though it's true that market rallies typically start when affairs look bleakest, bottom picking is a fool's game that rarely pays off.
And look for the sweet spots: Multinationals, especially U.S. firms. Pick high quality companies with steady growth and strong global positions, poised to benefit from the more robust growth of emerging markets and from export benefits generated by the dollar's continued weakness. Some that are attractively valued: IBM, Hewlett-Packard, Caterpillar, General Electric, Emerson Electric, Cisco Systems and Colgate-Palmolive.
Energy companies. With crude oil prices likely to remain strong -- and a decline of even 30% from today's prices would still be strong -- oil firms such as ExxonMobil, ConocoPhillips and Chevron will prosper. Ditto, energy service firms, such as Schlumberger, Weatherford International and Transocean. Talking about the upside potential for oil service firms, Jerry Jordan, portfolio manager of Jordan Opportunity Fund, says, "This earth needs more oil to satisfy our demands."
Agribusiness. Spurred by biofuels demand and animal feed needs, prices for corn, soybeans, wheat and other crops spell expanded acreage, bumper crops and bulging pockets for agriculture producers, processors and handlers. Farm equipment makers, such as John Deere, and seed firms, including DuPont and Monsanto, should reap a healthy harvest. Robert Turner of Turner Funds says, "I believe the agricultural cycle is only in the second or third inning."
Finally, consider playing defense. As long as the U.S. economy continues to sputter, consistent but unremarkable returns from makers and sellers of household staples and health care companies are attractive. Some with particular appeal: PepsiCo, Eli Lilly and Cardinal Health.
Mutual funds can offer much the same menu: global investment, inflation hedging defensive stocks, energy and agricultural offerings. A few no-load funds worth checking out are Marsico Global and CGM Focus, Vanguard Primecap Core, Marsico 21st Century and Fairholme.
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