In Moneyball, Lewis quotes Dick Cramer, cofounder of STATS, a sports statistics company: “Baseball is a soap opera that lends itself to probabilistic thinking.”
The world of investing is the same, and lately there’s been no better soap opera than watching the major indices hit near-daily all-time highs on hopes that President Donald Trump and the Republican-controlled Congress can lower taxes, slash regulations and find the money to invest in the military and infrastructure.
On Monday last week, the Dow Jones Industrial Average posted its 12th straight day of gains, a winning streak we haven’t seen in 30 years. And on Wednesday, it tied a previous record, set in 1987, for the fastest 1,000-point move. It took only 24 trading days for the Dow to surge from 20,000 to 21,000. (Since then it’s fallen below that mark.)
But like baseball, investing lends itself to probability thinking, and here we have experience as well.
As I’ve said a number of times before, we closely monitor the monthly Global Manufacturing Purchasing Managers’ Index (PMI) because it’s forward-looking rather than backward-looking, like gross domestic product (GDP). As such, we’ve found a high correlation between the PMI reading and the performance of commodities and energy one, three and six months out. When a “cross-above” occurs—that is, when the monthly reading crosses above the three-month moving average—it has historically signaled a possible uptrend in crude oil, copper and other commodities. Our research shows that between February 2007 and February 2017, the S&P 500 Energy Index rose 10.2 percent, 79 percent of the time after a “cross-above,” while the S&P 500 Materials Index rose 7.2 percent, 86 percent of the time. Knowing this helps us anticipate the opportunities ahead.
In February, the global PMI rose to 52.9, a 69-month high. It was also the sixth straight month of manufacturing expansion, which bodes well for commodities, materials, miners and other key assets we invest in.
Individual PMI readings for the U.S., eurozone and China—which together make up about 60 percent of global GDP—all advanced in February.
The eurozone’s reading of 55.4 was its highest since April 2011, with expansion being led by the Netherlands, Austria and Germany. The region is more optimistic about the future than at any time since the debt crisis, and the weakened euro has provided a welcome tailwind to help boost sales and exports.
China’s PMI held above 50.0, indicating industry expansion, for the seventh straight month in February on improved new order inflows, higher demand and greater optimism.
The U.S., meanwhile, ended the month with an impressive 57.7, its highest reading since August 2014. Of the 18 manufacturing industries that are tracked, 17 reported growth, including machinery, computer and electronic products, metals, chemical products and others. New orders rose significantly, from 60.4 in January to 65.1 in February, as did backlog of orders, which advanced a whopping 7.5 percent.
The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was trading at $209.67 per share on Monday afternoon, down $0.24 (-0.11%). Year-to-date, DIA has gained 6.16%, versus a 6.45% rise in the benchmark S&P 500 index during the same period.
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Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of 12/31/2016: Harmony Gold Mining, Northern Star Resources, Regis Resources, Sibanye Gold.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500. The S&P 500 Materials Index is a capitalization-weighted index that tracks the companies in the material sector as a subset of the S&P 500.
The Purchasing Manager’s Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
Frank Holmes is the CEO and chief investment officer of U.S. Global Investors. Mr. Holmes purchased a controlling interest in U.S. Global Investors in 1989 and became the firm’s chief investment officer in 1999. In 2006, Mr. Holmes was selected mining fund manager of the year by the Mining Journal, and in 2011 he was named a U.S. Metals and Mining “TopGun” by Brendan Wood International. He is also the co-author of The Goldwatcher: Demystifying Gold Investing. More than 30,000 subscribers follow his weekly commentary in the award-winning Investor Alert newsletter which is read in over 180 countries.
Under his guidance, the company’s mutual funds have received recognition from Lipper and Morningstar, two trusted independent financial authorities. In 2015, Mr. Holmes led the company into the exchange traded fund (ETF) business with the launch of the U.S. Global Jets ETF, which invests in the global airline sector.