Amid Gloom, Transports Boom


The World Bank lowered on Jan. 18 its 2012 growth forecast for the global economy to 2.5%, down from the 3.6% predicted six months ago. The estimate for developed economies fell to an anemic 1.4%, down from 2.7%. Emerging economies are expected to grow 5.4%, down from an earlier forecast of 6.2%.

Europe is widely seen as having entered a recession. Growth in several robust economies, including Brazil and India, has slowed sharply. China, with the world's second-largest economy, says its economy grew 8.9% in the December quarter, the lowest growth rate since 2009. Meanwhile, U.S. economic growth remains stubbornly slow, with consensus forecasts projecting about 2.5% growth in 2012.

Yet the Dow Transports, representing some of the most economically sensitive U.S. stocks, have rallied 29% since Oct. 3 and are within 8% of the all-time high reached in July. Broader measures of the transportation sector show similar strength, with key groups like railroads and airfreight up sharply from recent lows.

The Morgan Stanley Cyclical Index, composed of stocks highly sensitive to economic growth, remains 15% below its all-time high but is up about 30% since Oct. 3. Over the last three months, top-performing industry groups include such cyclical bellwethers as home construction, building materials, steel, and industrial materials.

In part, the resiliency of the Transports and other cyclical stocks reflects signs of strength in the U.S. industrial sector. U.S. factory activity surged in December, and industrial output is back within 5% of the September 2007 peak. New orders point to continuing strength in coming months. Even employment is showing strength, with 23,000 net new factory jobs reported in the December employment report, the biggest gain since July.

Also, investors may be looking ahead to a rebound in overseas growth rates. Much of the slowdown in developing nations reflects policy tightening initiated in late 2010 and early 2011, and those moves are already being undone in some nations as worries shift from inflation to recession. China has begun to ease monetary policy.


For now, with the Dow Theory in the bullish camp, our buy lists have 85% to 88% in stocks, with the remainder in a short-term bond fund. The recent strength in the Dow Transports and other cyclical stocks is bullish. A close above the all-time high of 5,618.25 in the Transports, while not relevant to the Dow Theory, would be an encouraging development. For new buying, especially attractive picks include Apple ($425; AAPL) and Visa ($103; V).

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