The Next Big Cyclical Play

What’s old is new again, and the current cycle is very much about specific sectors that can be thought of as “old economy.”

Transportation, freight, energy production, and transmission—it seems that basic infrastructure corporations are the new stock market darlings. It’s not uniform and not all old economy industries are participating, but many of these stocks are soaring, breaking the indifference that institutional investors had shown toward the markets for so many years.

Nothing exemplifies the old economy resurgence better than the stock market strength of Union Pacific Corporation (UNP).

In the last secular bull market, Union Pacific did virtually nothing on the stock market, except pay its dividends. This old economy company wasn’t stagnant in terms of growth; rather, investors just weren’t interested in the seemingly boring business of hauling freight by rail.

It wasn’t until the secular bull market ended that shares in the company began to really accelerate, as the marketplace wanted safety and predictability. Sentiment toward reliable, old economy names with realistic earnings forecasts changed on a dime.

Union Pacific’s long-term stock chart is featured below:

Chart courtesy of www.StockCharts.com

It really is a stunning reversal of fortunes among sectors with industrial, old economy names seemingly taking the place of the previous fad in fast-growing technology stocks.

As tastes and expectations among investors change over the long-term, so does investment risk. Just before the financial crisis of 2008/2009, Chinese equities became a hot-ticket item. Then alternative energy stocks, specifically solar panel companies, rocketed higher. Then the enthusiasm quickly disappeared.

Safety took over as the number-one issue and dividend-paying blue chips, including old economy industrial companies, became the primary focus of institutional investors.

With sustainability in the blue-chip rally, investors slowly began to loosen their tolerance for risk and expanded their willingness to speculate in other stock market sectors over Dow components. The rally broadened out to the NASDAQ and small-caps, and the last two years produced a powerful performance in biotechnology stocks, with annual Food & Drug Administration [FDA] approvals at a high.

Playing investment themes is a very difficult business to be in. Like timing the stock market, you can’t foresee what shocks, geopolitical events, or smooth sailing might be on the horizon.

But in this slow growth environment, I do see a market where existing winners will continue to produce solid returns plus dividends. Old economy names that have already done well should keep doing so. This really is a “hold” type of market.

I’m definitely not an advocate of loading up on new positions. The stock market is still due for a substantial correction. But the certainty that the Federal Reserve recently provided (right or wrong) is a major vote of confidence for institutional investors who most definitely will keep buying this market if earnings don’t disappoint.

In terms of investment themes, the old economy has staying power, as the outlook for basic infrastructure is improving.

One longer-term theme that I think is worthy of consideration as part of a portfolio strategy is the cycle in natural gas. (See “This Is an Investment Theme Worth Paying Attention To.”)

Prices are down now, but the natural gas build-out is happening. It definitely is an old economy energy infrastructure theme with excellent up-cycle potential.