By Bill Cara -
Whenever you hear the term ‘sector rotation’ in equity markets, you can be sure there are important things changing in the macro picture. As you know, the big picture today is one of a return to global economic growth, and higher commodity prices and interest rates. Now, it’s pretty hard to have economic growth without higher commodity prices and interest rates. They go together like Bacon-Lettuce-Tomato in a sandwich. And, as long as the ingredients are in balance, there is not much for investors to do but enjoy. Too much of one or another, however, spoils the sandwich.
So, investors are ever vigilant. If the economy grows too fast, for instance, there is the possibility that interest rates and/or commodity prices will soon follow the economy up the growth curve, which is not such a good thing. It brings with it, the specter of inflation. Inflation that becomes a reality, of course, raises the price of tangible assets (e.g., real property) and lowers the price of financial assets (e.g., stock prices and the value of money). So while successful investors like to see a lift to the value of their home, their securities portfolio, typically being either larger or more transient among their holdings, becomes their biggest concern.
To help us with the macro picture, economists use what they call ‘leading indicators’. Things like jobs and stock prices are leading economic indicators (LEI). The most important economic data of course comes from the largest economies in the world, which are collectively known as the G-7 countries of the Organization of Economic Co-operation and Development (OECD), which are the U.S., Japan, Germany, Britain, France, Italy and Canada. Russia and soon China will be in that group. Today the OECD reported that global economic expansion is continuing but the pace of growth is slowing – particularly in the United States and the Eurozone. Higher commodity prices, like oil, plus increases in interest rates, will have that effect.
Source: Trader Wizard Perspective
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