google.com, pub-2431335701173086, DIRECT, f08c47fec0942fa0 February Stock and Fund Picks - MarchéEconomics

February Stock and Fund Picks

February 5, 2020

google.com, pub-2431335701173086, DIRECT, f08c47fec0942fa0

All business cycle monitoring sites from Seeking Alpha indicate an ongoing expansion that is simply slowing down due to a lack of private sector investment, industrial production, and anti-supply-side protectionist trade policies. Instead of cyclical indicators only, I prefer to also look at the misery index as an indicator of a potential recession. The misery index is the positive or direct relationship between the unemployment rate and the inflation rate. This relationship replaces the old and no-longer in existence Phillips curve that represented a trade-off or inverse relationship between inflation and unemployment rates. Keynesians thought that a Phillips curve argued for more activist government management on the expenditure side of the economy. Since the Phillips curve vanished about 20 or so years ago this argument is no longer valid (although some Keynesian college texts still use the non-existent Phillips curve as the basis for a short-run aggregate supply curve in their completely irrelevant economic models).

The misery index goes up when there is an outside supply-side shock to the economy such as the oil supply shortages of the mid 70s and early 80s. It goes down when things are good. Supply-side effects, either from policy or from happenstance, now dominate the business cycle. For example, during the Clinton administration there was first a large tax increase and military expenditure cuts and Republicans swept into Congress, there were also large cuts to social programs. The resulting budget surplus was contractionary on the expenditure side (tax increases and expenditure decrease) but the increased utilization of computers in offices and low oil prices created dominate supply-side effects that produced a business cycle upturn. Unemployment and inflation, that is the misery index, went down and things were good.

These days we have to worry about the mix of government policies leading to an increase in the misery index and causing a recession. Protectionist trade policies slow production in the 30 to 40 percent of our economy engaged in international trade. All tariff costs have been forward shifted into US consumer prices which is inflationary. Less investment decreases growth in labor productivity which is also inflationary. It also limits future capital expansion and associated job growth which will eventually contribute to increases in unemployment. The Feds dovish accommodation of protectionist trade policies are inflationary, and because they push interest rates down stocks look overly attractive causing the stock market to overheat. The slowdown in trade related economic activity such as in transportation, sea port activity, and trucking and transportation will also lead to increased unemployment. The misery index, which will be creeping slowly upwards, will shoot up rapidly and a recession will ensue when the stock market crashes.

In the meantime, the market is still relatively safe and one can consider (that is, research) the following stocks for growth: MX, PERI, EVRI, FRTA, KBH, OESX, ARAY, TNDM, VCEL, TRUP, and ICHR. For dividend growth, take a look at: BMA, APAM, CMRE, BHP, CVX, GLP, MBT, SNR, PDCO, RCII, SPH, and WES. AS for the best ETFs, consider IVG, XLK, VGT, FTEC, and IYW. Of course if you want CEFs for income, then look at those in my previous spread sheets and pick only those selling at a market price that is less than their net asset value. You can find current NAV and price information on the Fidelity web site. Good investing!

More about Gary Marché

I have a PhD in economics with emphasis in International Economics, Comparative Economic Systems, Open Economy Macroeconomics, Public Finance, and Policy Analysis and Program Evaluation. I am also a successful life-long investor . . . and hope to continue to be.