Peering into the future

Where is the stock market headed?  Will it improve or decline?  

The larger question, of course, is:  in what direction is the U.S. economy trending?

AMRMX Mutual Fund

The AMRMX mutual fund is presently a good indicator of where the best strength of the economy may be found.

AMRMX is a mutual fund that focuses on companies with “conservative growth and income investing. Invests primarily in well-established companies with strong balance sheets and a history of consistently paying dividends, helping to provide downside resilience.”

Compared to small-cap funds, aggressive and future-growth funds, and bond funds, for the last month or two, AMRMX has been a top performer.  AMRMX should probably be considered a very conservative fund; it focuses on “well-established” companies – that is, traditional and staid, not flashy.  It looks for two traditional signs of corporate strength:  “strong balance sheets” and “a history of consistently paying dividends” – again, traditional signs of well-managed, prosperous, proven companies.

For AMRMX to be an out-performer mutual fund, the bedrock of the U.S. economy must be in pretty good shape.  

Small-cap stocks and the Russell 2000 Index

“Small-cap” stocks are the stocks of small companies – those companies worth between $300,000 and $2 billion.  

Small-caps do not do well during economic downturns.  When orders for their products decline, they are easily hurt, and must curtail research, advertising, and being able to afford good people as employees.  

On the other hand, when demand for products is increasing, small-caps are more nimble than larger companies.  They can react to their market’s demand for their products more quickly.

The Russell 2000 Index tracks small-caps.  When watching for signs of a turnaround in the economy, one good indicator is steady increases in the Russell 2000 index.  

Similarly, the SMCPX mutual fund focuses on small-cap stocks.

If it appears to you that the Russell 2000 Index, its Exchange Traded Fund (“ETF”; see last month’s Investors Column), “IWM”, and the SMCWX mutual fund are showing signs of improving performance, such signs are a good indicator of a generally improving U.S. economy.  

Railroads

Railroads are the main means of shipping goods all over North America.  The major railroads are Norfolk Southern (stock symbol “NSC”), Union Pacific (“UNP”), CSX (“CSX”), Canadian National (“CNI”), and Canadian Pacific (“CP”).  

Tech companies may ship their products over the Internet, but we all buy hard goods – homes, business buildings and equipment, food, clothing, machinery, fuel, etc.  When we (personally and as companies) have more money, we purchase more hard goods.  That in turn means more shipping for railroads, which increases the value of those railroads – and their stocks go higher as a result.  

If you see an upward trend in railroad stock prices, that can only be because of a growing economy.  

Bond Funds

Mutual funds that focus on Bonds are generally favored by people who are extremely conservative in their investments.  The growth of Bond funds is comparatively slow.

However, during economic downturns, Bonds funds tend to hold their value, or even increase, as investors switch their investments from stock funds to bond funds - i.e., selling shares in their stock funds and buying shares of bond funds.  

Bond fund performance that is flat or trending downwards is an additional indicator that the economy is improving.  

Growth funds

Contrary to Bond funds, growth-oriented mutual funds do poorly in economic downturns, when growth slows to a minimum.

Growth funds trend upwards, however, when people believe the economy is improving.  Growth funds tend to focus on markets such as tech stocks, AI (Artificial Intelligence) stocks, and any other cutting-edge industry where the prospect of a boom cycle is generally expected.

The AI boom cycle of June and July, however, also demonstrated what happens when the prospects for a new technology are not quite as ready to be economically feasible as some investors have been hoping.  

Those stock prices skyrocketed unrealistically – and then the boom turned into a bust.  

Bellwethers

Learn the bellwethers that portend where the stock market – or a subset of the stock market – is headed, and how to apply that knowledge to your advantage, and become a much better investor.

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