Former Investor’s Digest of Canada editor Carlyle Dunbar argues that deflation is on its way. But when? In the meantime large-cap healthcare and information technology stocks are now starring on Wall St. Consider such stocks as Amgen, Pfizer, Eli Lilly, Bristol-Myers Squibb, Abbott Laboratories, Apple, Google, Accenture, Intuit, even Big Blue itself, IBM.
Deflation is inevitable. I’m just not sure if it’s a long way off, or right around the corner.
The deflation I’m talking about usually lasts about 75 years. Far from being a 1930s-style depression, it’s a period of both price stability and price decline, as well as an epoch of great human progress. The Age of Enlightenment — that period of rational thought and reason in 18th-century Europe — marked one such era; the Victorian age, in the 19th century, marked another.
But Bay Street, Wall Street, the central banks, deep-in-debt governments — everyone, it seems, hates the possibility of deflation. Indeed, governments and central bankers count on invigorated inflation to help them get out of the hellish situation they’ve put themselves in. But for the rest of us, deflation would be a good thing.
Our current wave of inflation started 120 years ago. It followed years of stability, an easing of prices, along with great leaps in science, industry and living standards. Historians have traced alternating bouts of inflation and deflation back for several thousand years, so, the eventual flip to deflation will be nothing new.
True, there will be a big bump in the transition, perhaps worse than it should be thanks to government delusions of creating prosperity by printing money. But after that, things will get better.
In fact, most people gain from deflation. Prices stabilize or even drop, purchasing power gradually rises, while income inequality shrinks. Moreover, stock markets get to break loose from the malign influence of quantitative easing, as well as from suppressed short-term interest rates.
Time for deflation could be near
So, when will deflation arrive? As I noted at the outset, it’s hard to say. Still, I think the next installment is close at hand. For starters, we’re experiencing some trends that occur when a big inflationary wave breaks.
One trend is rising — even, gaping — income inequality. Another trend is an end to stratospheric prices for oil and gas. Having peaked in 2008, they’ve yet to climb back. Indeed, oil and gas have taken a real tumble. Moreover, they could fall even more, given that natural gas seems poised to slide to less than $US1 per million British thermal units. Only a year ago, it topped $6.
Another deflationary sign? Chaos in the stock markets. Although the evidence isn’t conclusive, the desperate search by investors for higher returns suggests the shift may have already started. Of course, inflation could still come back with a vengeance. And you can just imagine what oil and gas prices will do if that happens.
In the meantime, the Wall Street bull continues to rage, although in Canada, stocks still lag behind, weighed down by weakness in both financial services and the resource sector. The upshot? Wall Street is where you’ll now find opportunities — particularly since the loonie doesn’t seem to have bottomed out yet.
For their part, U.S. opportunities are momentum plays, given that major sectors of the market are either rising to new highs, or retreating from recent peaks. Moreover, there aren’t any big industries rallying from a major low.
In the interim, keep your eyes on price momentum: the rate at which a price is rising, or falling. A marked slowdown signals caution. Over the long term, trends in relative performance are highly significant. Such trends generally run for years.
Tech stocks and healthcare stocks lead the market
That’s why you should take a good look at information technology and healthcare solutions if you’re heading for Wall Street. From 2008-’09, both sectors managed to beat every other sector except financial services and consumer staples. But since 2013, both IT stocks and healthcare stocks have trumped the rest of the stock market.
Over the short term — that is, over six months or so — consumer-related industries will be winners. Look to them for short-term opportunities.
For its part, the consumer discretionary sector has become the hottest part of the market over the past six months. Standouts here include movies and entertainment, household appliances, home furnishings, home improvement retailers and even home builders. The other strong player in the consumer discretionary sector — and, a newly popular one — is car dealers.
In information technology, the strongest player is now home entertainment software which, of course, also fuels the consumer discretionary sector.
In consumer staples, the other consumer-related sector of the market, two industries continue to set the pace: drug stores and grocery chains. Both offer dividend income and relative price stability.
If you do take a walk down Wall Street, choose big caps, rather than small ones. Not only are big caps generally safer than small ones, but their share prices are usually steadier.
Best healthcare stocks are the large-caps
In healthcare solutions, many big caps now look very attractive. They’re beating the market. And their technical prospects over the short term are good.
Some examples include Amgen Inc. (NASDAQ─AMGN), Pfizer Inc. (NYSE─PFE), UnitedHealth Group Inc. (NYSE─UNH), Eli Lilly & Co. (NYSE─LLY), Bristol-Myers Squibb Inc. (NYSE─BMY), Biogen Inc. (NASDAQ─BIIB), Abbott Laboratories (NYSE─ABT), Aetna Inc. (NYSE─AET), Anthem Inc. (NYSE─ANTM) and Thermo Fisher Scientific Inc. (NYSE─TMO).
But healthcare stocks you should now avoid include AbbVie Inc. (NYSE─ABBV), Johnson & Johnson Inc. (NYSE─JNJ), Baxter International Inc. (NYSE─BAX) and Express Scripts Inc. (NASDAQ─ESRX).
There is one small-cap healthcare stock that’s now a good buy: Akorn Inc. (NASDAQ─AKRX), a niche-market maker of branded prescription pharmaceuticals, as well as both animal and consumer health products. Headquartered near Chicago, Akorn boasts strong market action, as well as a strong pipeline of drug therapies.
Best technology stocks to buy
Of course, the possibility the U.S. will see yet another high-tech bubble has recently been the talk of Wall Street. And undoubtedly, many information technology stocks are undergoing a correction, or are now clearly headed down.
But because IT is today’s cutting-edge sector, it’s hard to dismiss high-tech stocks as has-beens.
In U.S. high tech, Apple Inc. (NASDAQ─AAPL), the dominant player, remains a favorite — and, with good reason. Having peaked almost three years ago, the company has now hit new highs.
Not only has its relative strength almost bounced back to its record high, but an increase in relative strength would be a big plus for Apple shares.
Moreover, who cares if the company’s new Apple Watch is less than a howling success? Apple has so many innovative, trend-setting products on the market that their sales momentum alone will carry the company.
Information technology stocks push higher
Besides Apple, seven of America’s other 30-biggest IT stocks continue to push higher.
First off, there’s Google Inc., the Darth Vader of the Internet, with its two classes of shares: C (NASDAQ─GOOG) and A (NASDAQ─GOOGL).
Other IT stars include Accenture Ltd. (NYSE─ACN), Avago Technologies Ltd. (NASDAQ─AVGO), Salesforce.com Inc. (NYSE─CRM), Cognizant Technology Solutions Corp. (NASDAQ─CTSH), Intuit Inc. (NASDAQ─INTU) and TE Connectivity Ltd. (NYSE─TEL).
There’s also a turnaround candidate: Big Blue itself, a.k.a. International Business Machines Corp. (NYSE─IBM).
Investor’s Digest of Canada, MPL Communications Inc.
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Investor's Digest of Canada •5/5/15 •