One of the more common themes that I keep reading about these days is the strength of U.S. economic growth. It’s important to get at least some understanding of the potential for economic growth, as this will impact your investment strategy.
Recent data is definitely making me ask the question: just how strong is the level of economic growth in America?
We all know that this holiday season was much weaker than expected for retail companies. Considering that consumer spending fuels the majority of economic growth in America, this is certainly not a positive environment for that sector—but that shouldn’t be a real surprise to my readers, as I have recommended an investment strategy that has avoided retail stocks for months.
If economic growth is weak in retailing, are there any bright spots for larger goods?
According to the U.S. Department of Commerce, the latest advance report on durable goods was quite disappointing. New orders for durable goods during the month of December dropped 4.3%, core durable goods orders during December dropped 1.6%, and excluding defense, new orders were down 3.7%. (Source: U.S. Department of Commerce, January 28, 2014.)
Another worrisome data point in the report showed that the inventory level of manufactured goods in December was up 0.8%, the highest total amount since this data series was published and also the eighth monthly increase over the last nine months.
How should you formulate an investment strategy with this information in mind?
Economic growth depends on a continued increase in consumption and production. We saw consumers pull back over the holiday season, which is clearly not a positive sign for future economic growth. Large items in the form of durable goods are continuing to pile up as inventory—also not a positive sign for economic growth, unless firms can be assured they are able to sell these goods.
With this backdrop, it is difficult to see how economic growth will accelerate in any significant way over the next few months. With that in mind, you should consider an environment in which economic growth will continue to remain stagnant when formulating your investment strategy.
As I’ve stated earlier, my readers know that I’ve advised an investment strategy that steers clear of retail stocks. However, there are some companies that can continue growing even if economic growth remains muted.
One sector is biotechnology. An investment strategy that incorporates some biotech companies can help mitigate overall portfolio volatility, even if economic growth were to weaken. People get sick regardless of the strength or weakness behind.economic growth.
Of course, biotech companies can be a risky investment strategy as their success or failure depends on creating innovative new drugs, and not the level of overall economic growth here in America or abroad.
One way to approach an investment strategy in biotechs is to own a basket of larger integrated companies along with a few smaller, riskier firms that offer a promising pipeline of drug development.
Focusing on research and development is important for future biotech innovations, and it’s one characteristic I look for as part of an investment strategy in the biotech sector. One example of the type of company that might be worth exploring further is Biogen Idec Inc. (NASDAQ/BIIB). Even with growth in the American economy being relatively weak, this giant biotech firm is still generating overall revenue growth above 25%.
Chart courtesy of www.StockCharts.com
The stock has performed extremely well over the past year, and I would prefer waiting for a pullback before looking to add this type of company into a well-diversified portfolio.
For the health of your investment strategy, make sure to incorporate some companies that are less affected by weaker growth in the U.S. economy. This gives you exposure to the market while mitigating overall risk.