Market Review & Outlook

To a great extent, the market's balance in the shorter term rests on a fulcrum represented by the price of a barrel of oil. If oil prices break out yet again to the upside, it will be very difficult for any areas of the stock market to do well, perhaps even energy itself. If, on the other hand, oil prices retrace their recent parabolic moves and fall back to longer term and more sustainable trends, it would usher in a period of multiple expansion for U.S. stocks and provide a breath of fresh air to the markets, particularly the beleaguered consumer discretionary sector.

Why might oil prices decline? In a word, slowing overseas economies, particularly China. High rates of inflation, tight monetary policy, a decline in leading indicators and a stock market more than fifty percent off its highs all suggest that an overseas slowdown is much more plausible than many may recognize.

While the continued implosion of the financial services sector has caused us to dust off our notes and take a second look at a potential buying point, we are not yet pulling the trigger. In general, we have also been reducing our exposure to the energy and industrial complex, while taking a more positive posture on the consumer discretionary sector. While this may be a bit too contrarian for most investors to stomach, there is another opportunity worth exploring as well, and it resides in technology sector.

Necessity, Plato once said, is the mother of invention. New inventions may be conceived by gee-whiz moments, but they are often only fully adopted when paired with painful problems. While we do not yet know if we have hit a flashpoint in oil prices, it is very likely that we have. In an intensely competitive global economy, it is difficult for companies to raise their end prices to consumers. Eventually, they will walk out on you.

So, how will companies respond? By getting more productive throughout their organizations. This overall shift should start to manifest itself in expanding multiples for the technology sector and other innovative companies that help customers defend their margins in a period of high and rising input costs. Innovation may be on the upswing and investors should take note.

(c) Broadleaf Partners, LLC

www.broadleafpartners.com