What can you do to get a handle on reality in today's manic-depressive stock markets?
Shut out the background noise--all the chatter about one month's trade figures, or a day's trading of the dollar--and concentrate on asking the right questions. What is happening, and why? Who's helped and who's hurt?
What's happening is that the economy is going through a change, and beginning to grow more rapidly than it has been doing. Interest rates are going up, but that is unlikely to choke off a return of good times to the industrial Midwest.
Yes, list the Rust Belt among those helped. The Midwest's manufacturing companies are finding golden business in foreign markets, where the weak dollar is making their goods competitive and yielding them big profits, too.
That's right, foreign markets. U.S. exports are getting much stronger thanks to the weak dollar. But success is masked because the weak dollar makes imports more expensive. Therefore, when statistics express foreign trade in dollars, it looks like imports are galloping and exports are crawling.
U.S. companies know that the true situation is just the opposite. Caterpillar, the big construction machinery maker from Peoria, Ill., is able once again to win business overseas because the weak dollar makes its excavators bargains in terms of yen or francs. At the same time, Cat's foreign competitors have difficulty selling in the U.S. market because their currencies make their bulldozers expensive.
Ford and Chrysler think the currency is such an advantage that they plan to export U.S.-built automobiles to Europe.
What about inflation? Some people say that interest rates are being raised to stem inflation--caused in part by imports. The answer: interest rates are going up, but inflation isn't the reason, or a big worry. Economist David Levine of of the Sanford C. Bernstein research firm estimates the underlying rate of inflation--excluding imports--at 3.1%, going up to around 4.4% by next spring. Even including imports, inflation stays under 5% well into next year.
The truth is, interest rates are rising because business is picking up, especially in manufacturing industry, which has grown more lately than it has in years. Essentially, the Midwest didn't have a recovery from the 1982 recession. What it had was a terrible struggle to hold its own against foreign competitors, while hobbled by the then-strong dollar. Now, with opportunities at home and abroad, companies are expanding their plants and renewing equipment.
"Our basic industry has been decimated in recent years," says Charles Clough, chief investment strategist for Merrill Lynch. "Now they're going to rebuild it."
Yes, but won't high interest rates sink the stock market? Maybe, maybe not--you can't predict with certainty. Kenneth Fisher, money manager and author, points out in his new book, "The Wall Street Waltz," that over the last 56 years, interest rates and markets have sometimes gone up together, or down together, and sometimes they've gone in opposite directions.
So don't waste time trying to predict the market's turns. Think instead about which stock groups will be hurt, and which helped.
Housing will be hurt as it usually is as interest rates rise. But the effect on car sales and other retail spending remains to be seen. The jobs and paychecks of an export-led economy might mean a lot more than interest rates to consumer spending.
There's no doubt that borrowers will be hurt, says Stanley Salvigsen, of Comstock Partners, an investment firm that manages the Dreyfus Capital Value fund. And not only consumer borrowers either. Financial service companies, leveraged buyout companies and those financed by junk bonds--all the winners of recent years--will be hurt in the new cycle.
And industrial America will be helped. That's why Alcoa and Caterpillar are hitting new highs, and why lesser-known companies with a big share of foreign business, such as Nordson Corp. of Cleveland, will probably be "discovered" soon by market experts.
What do the market's gyrations mean? That it's Cleveland and Peoria's turn in the fast lane.