The first quarter ended with investors returning to reality. since the election much enthusiasm existed that the administration and congress could deliver major new legislation dealing with healthcare, tax reform and infrastructure investment. with the initial failure of healthcare reform, investors reduced their expectations for tax reform and returned to economic reality---which still remains positive but, as always, changing.
First let’s look at some perspective. normally, recoveries will be led by housing and autos. both industries benefit from low interest rates at bottoms of economic downturns. in this recovery, autos filled this role but not housing. now we see auto sales lessening their contribution. in march, annualized vehicle sales declined 10% from december levels to 16.6 million. longer term, the declining percentage of young licensed drivers may contribute to annualized vehicle sales retreating well below 16 million annualized.
Business Cycle Shift
If a lower level of vehicle sales continues, it may further mark the shift of the business cycle phase from recovery to expansion. with that, the focus would further shift to cyclical industries that benefit from this change. at the same time, it begins to sharpen sensitivity to the possible maturing of the current business cycle.
Cyclical Shift-What Changes?
Nonetheless, what does this mean for investors if we do see continued progression in the business cycle. more than likely industrial, heavy equipment companies, and other cyclical will gain investors further attention. such industries normally benefit at this stage of the business cycle.
Over the last few years, companies in the basic metals industry restructured to bring production more in line with future demand. these companies will particularly benefit from their substantial operating leverage at this stage of the business cycle—not that it escaped investors notice.
Global-U.S. Companies And U.S. Dollar Weakness
First quarter and probably first half earnings for u.s. global companies will likely benefit from recent weakness in the u.s. dollar. the wall street journal dollar index declined 2.8% in the first quarter. this represented its biggest quarterly decline in a year. this reversal in dollar strength reflects, in part, reduced optimism investors held for the administration's economic proposals. in addition, and importantly, building optimism for the international economic outlook strengthened other currencies relative to the dollar.
First quarter dollar weakness could produce better than expected earnings comparisons for many u.s. global firms. companies in industries such as pharmaceuticals, technology, industrial, and consumer product companies would benefit. this represents a limited list and readers could add many others.
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