CHICAGO (Reuters) - If you were betting on a big rebound for any one sector this year, you probably would have put your money on banking instead of manufacturing.
The more glamorous rebound story has been banking and the financial services sector, but with the revelation of a $2 billion trading loss at JP Morgan Chase & Co, it’s clear some of the biggest banks may have not taken the lessons of 2008 seriously. They continue to bad-mouth and fight reforms and engage in risky derivatives trading, and there is likely more dirt under the carpet in that sector.
Megabanks are difficult to divine. The economy might be rebounding, but they might not lend widely and focus instead on making more money from their trading desks, which are still largely a black box to investors.
“Investors should stay away from financials,” says Lee Munson, a money manager with Portfolio LLC in Albuquerque, New Mexico, and author of “Rigged Money.” “I can’t figure out what’s in them. There are more time bombs out there.”
U.S. manufacturing, in contrast, is a warts-and-all comeback kid story that doesn’t get much attention. Many of the industries left for dead in the wake of the Great Recession have undergone massive restructuring and are much more productive than they were five years ago. Industrial production posted its fastest growth in a year in April, according to the Federal Reserve.
Provided the U.S. doesn’t slip back into recession, manufacturing could be the long-term investment that offers some durable profits over the next few years.
Industrial production is forecast by the Federal Reserve Bank of Chicago to rise at a “solid pace” over the next year, says William Strauss, senior economist for the Chicago Fed.
Light-vehicle sales are set for improvement this year and next. Industrial output in manufacturing has risen 6.7 percent over the past 33 months and has recovered almost 74 percent of its loss from the recession trough.
When an economy rebounds, more cars, appliances and durable goods are made. Basic industries buy more materials to produce them. It’s a rising tide that lifts all boats, particularly in the global market for manufactured goods and materials, which has been expanding due to increasing wealth and demand from emerging economies such as China, India and Brazil.
Manufacturing is also remarkably transparent. Companies often make things because they have orders in hand. They adjust inventories based on the business climate, then ramp up production accordingly. That’s why capacity utilization, a measure of how much producers are using their resources, rose to 79.2 percent in April, the highest since April 2008.
Yet it makes little sense to pick single stocks and hope for the best. There’s too much volatility and it’s too easy to make the wrong bet. It’s worth considering a broader approach such as the iShares Dow Jones US Industrials Index Sector ETF, which holds the major U.S. manufacturing companies.
For a more focused play, the iShares DJ US Energy, buys oil, gas and pipeline companies. As the U.S. once again becomes a major energy exporter because of the huge natural gas and oil reserves discovered in recent years, this is a reasonable vehicle for growth.
You also may consider a stake in the companies that make or produce the basic materials of industrial expansion. The Vanguard Materials ETF owns everything from chemical to steel companies.
Of course, not every manufacturer is rebounding and the comeback road is steep. The overall loss of output in the recession was the worst since the 1930s, according to the Chicago Fed’s Strauss. Home construction and sales are perking up, but still limping along and won’t come back until excess home inventories are reduced and employment recovers.
You should also keep in mind that, while recent reports are positive, the long-term picture for the U.S. economy is muddy at best. A recent report from the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region contracted in May to its weakest level in eight months.
And it’s still uncertain how Europe’s economic problems will affect North America. That saga is far from over.
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)
Follow us @ReutersMoney or here; editing by Beth Pinsker Gladstone and Andre Grenon