In September 2013, the manufacturing PMI New Orders Index slipped to 60.5–down slightly from a one-year high of 63.2 in the preceding month but still up significantly from the May reading of 48.8. This uptrend suggests that US economic growth has accelerated and finally shaken off the lingering effects of tax hikes and spending cuts that were implemented at the beginning of 2013.
And the US isn’t the only economy that’s showing signs of life: The EU has started to recover from a prolonged downturn.
The most salient indication of the improving outlook in Europe is that regional credit and equity markets no longer plummet in response to every negative headline.
Case in point: For much of the past three weeks, Italy’s coalition government appeared to be on the verge of collapse, while former Prime Minister Silvio Berlusconi–a fixture of Italian politics for more than two decades–could be expelled from the legislature because of his recent convictions.
In summer 2011, these developments would have sparked a selloff in Italy’s bond market and European equities. What a difference a few years makes: The FTSE MIB Index, which tracks the 40 largest names that trade on the Borsa Italia, has surged by more than 10 percent since the end of August and hovers near a 52-week high. Meanwhile, 10-year bonds issued by the Italian government stand at 4.3 percent, compared to 7.5 percent in late 2011.
Traditional economic indicators also indicate that the EU economy has strengthened in recent months. Markit’s manufacturing PMI for the eurozone ticked up to 51.1 in September, continuing its steady improvement from a mid-2012 low of 44.
Buy Cyclical Stocks Leveraged to Economic Improvement
Since Capitalist Times Premium launched in June 2013, we’ve pounded the table for cyclical names with the most exposure to economic growth, highlighting the energy and industrial sectors as being ripe with favorable valuations. At the same time, we’ve warned readers to avoid consumer staples and other overvalued safe havens that investors piled into amid concerns about the sluggish recovery. (See The Great Rotation.)
This strategy has proved prescient in subsequent months, with the consumer discretionary, industrial and basic materials sectors outperforming the S&P 500 in the third quarter. More important, the average pick in our Wealth Builders Portfolio has outperformed the S&P 500 by about 5 percent between June 20, 2013, to the end of the third quarter.