Economic indicators show that the recovery in the US economy is well underway. According to the Commerce Department consumer spending increased 0.7% in February which is the biggest gain in five months.
Despite the Conference board’s weaker consumer confidence numbers, the housing sector seems to be in the midst of a solid recovery as both single-family home-starts and builder permits were significantly up in February (year-over-year).
The labor market conditions have been also showing signs of improvement as companies seem to have started hiring. The recent Cypriot crisis did not seem to be a major risk to the US economy.
Although we believe the GDP growth in 2013 will be dampened by the cutbacks in federal spending, there seems to be a strong momentum both in investment and private consumption thanks to stronger job numbers and a slight increase in wages.
These positive economic developments are accompanied by a fall in inflation expectations and rising company earnings. However, despite the S&P 500 reaching a record level, share volumes seem to be low, indicating that investors are still hesitant about the market. The stocks that have outperformed in the first quarter of 2013 seem to be defensive stocks such as healthcare, rather than cyclical stocks.
In our Covestor Long Only Sector Rotation portfolio, the housing stocks such as PulteGroup (PHM) and Lennar (LEN) have benefited somewhat from the recent upswing in the housing market.
However, we believe that given the strong revenue and net income growth, home deliveries and new orders momentum, and the reasonable valuation levels, these stocks still have a long way to go.
Despite the rally in the markets, the performance of some energy stocks in our portfolio has been slightly disappointing. Chevron (CVX) suffered some loss due to concerns over multiple spills from ruptured pipelines. However, the company has an operating margin that is above the industry average and we believe these issues are unlikely to be a serious threat to the long-term performance.
There has been a 12% rally in natural gas prices in March, and gas stocks in our portfolio such Range Resources (RRC) and SouthWestern Energy (SWN) have benefitted from this.
As far as the metal stocks in our portfolio like Eldorado (EGO) and Silver Wheaton (SLW) are concerned, we intend to hold on to these stocks despite the recent disappointing performance.
We believe inflation may become an issue toward the end of 2013, as house prices and wages finally catch up with the excess liquidity in the market. Furthermore, official gold reserves of global central banks seem to be increasing, which supports the gold price.
The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
