One of my big themes for this year since January was that China would have more of an impact on US stocks than Europe would – up or down. So far that’s been a money call. In all of my media appearances and here on the blog I’ve repeatedly talked about my distaste for commodity-related plays and industrials that were levered to China. We’ve been underweight cyclicals and materials and plan to remain so while everyone tries to figure out how much China is actually slowing.
I want to show you a random selection of Industrial Metals & Mining sector charts – virtually the entire industry group looks like this and it’s horrendous:
I can’t think of any reason why you’d want to be leaning into this sector, and the valuation arguments are not compelling. Really cyclical stocks always are most dangerous when they look the cheapest – because the smart money knows the earnings are peaking for the cycle (think homebuilders with PE multiples of 6 or 7 back in 2006). They always look “expensive” precisely when earnings are troughing. Right now I think they’re in no-man’s-land and earnings revisions will be to the downside if China deteriorates even further.