More encouraging to us is the fact that we are starting to see a pick-up in capital spending, particularly from those companies selling products abroad. I have included another ISI chart below, which shows the sales of companies specializing in capital goods, such as Boeing, Caterpillar, Joy Global and Deere & Co. These large industrial companies have seen a pick-up in domestic orders (blue line) but are also starting to see a recovery in their foreign sales (red line). This is important since foreign sales of capital equipment had started weakening back in early 2011 when the Euro-crisis hit and then continued falling in 2012 as Chinese growth slowed down. The recent strength in both the domestic and foreign components bodes well for global growth and business confidence going forward. Capital Spending picking up Globally

The worst damage to stocks in March came in the ‘growth’ sectors of the market, as the wings of the high-flying technology and biotech stocks got clipped. Growth stocks have moved significantly higher and many investors have been worried about ‘bubble valuations’ in the sector. The Internet and Biotech sectors have lead the advance, gaining 400% and 300%, respectively, over the past five years. Many new companies are now trying to cash in on this excitement, going public with little or no revenue, which is disturbingly reminiscent of the ‘dot-com’ bubble days of the late 1990’s. Other big advancers have included Netflix and Tesla Motors. While both are great companies with strong business growth strategies, the valuations have clearly gotten excessive. Both are now profitable but the market capitalization of Tesla, at about US$25 billion, is over half of that of General Motors, but its annual sales of vehicles right now are the same as GM sells in a single day! While that’s not the final metric for measuring stocks, it clearly points to some valuation risks.

The bigger picture underlying the weakness in the growth stocks in March, in our view, has less to do with the worries about ‘market bubbles’ (which rarely occur when everyone is talking about them) and more to do with the natural ‘sector rotation’ that occurs in the stock market as economic growth moves into the more ‘mature’ stage of the cycle. The chart below shows the typical rotation through a normal economic cycle (even though every cycle is different and you will rarely get general agreement on what part of the cycle we are in at any given point in time). But generally we see defensive stock groups such as utilities, health care and consumer staples doing relatively better late in a recession and early in the recovery period when growth is slow and interest rates are falling. Then, as the cycle starts to pick up momentum, the consumer groups (retail spending) and growth stocks (biotech, emerging technology, communications, telecom) tend to take the lead. That was the case in the U.S. market from mid-2012 until early this year. Normal Rotation to Cyclical Stocks

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