These Stocks Will Drive the Market Higher — Regardless of High Oil Prices

Some investors are worried that high oil prices will drag down the U.S. recovery – and the stock market rally it’s spawned.

But even though some stocks look to be topping out, the major industrial stocks behind this bull market are plowing ahead.

Don’t get me wrong – some real heavyweights look poised to hit the mat. International Business MachinesCorp. (NYSE: IBM) looks like it could be settling in for a prolonged sideways shuffle after reaching new all-time highs in January. Amazon.com Inc. (Nasdaq: AMZN) looks like it has put its finger on the wrong page. And Google Inc. (Nasdaq: GOOG) looks like the two letters in the middle of its name – big zeroes.

But these companies are not what the recent advance has been about. The advance that began in March 2009 has been about the industrials. It’s about the manufacturers – the companies with factories that you can see in your mind’s eye with smokestacks puffing away like black-and-white pictures in an old book.

This move has been about Honeywell International Inc. (NYSE: HON). It’s been about E.I. du Du Pont de Nemours & Co. (NYSE: DD). And it’s been about Exxon Mobil Corp. (NYSE: XOM) and Pfizer Inc. (NYSE: PFE).

These are the big guys, but the smaller companies are on board, as well. I’m talking about firms like Gardner Denver Inc. (NYSE: GDI), which makes compressors, blowers, pumps and loading arms, and Roper IndustriesInc. (NYSE: ROP), which makes wastewater pumps and industrial imagers and portable grinding machines.

These are the companies driving the stock market bull. And they will continue to do so.

The data is crystal clear on this subject: Gains in orders, inventories, employment, and exports collectively are sending a strong signal that factories will continue to propel the expansion.

[More from Jon D. Markman: "Million Dollar Question: Will Stocks Keep Going Up?"]

Consider the following:

• The U.S. Department of Commerce said yesterday (Wednesday) that inventories at U.S. wholesalers rose more than forecast in January as distributors tried to keep pace with sales that rose by the most since November 2009. The 1.1% increase in stockpiles followed a revised 1.3% gain in December. Sales jumped 3.4% in January, led by cars, computers and commodities.
• Car sales were particularly impressive, as sales rose 6.4% to a 13.4 million unit annual rate in February,according to data provided by Ned Davis Research (NDR). That’s the most since the cash-for-clunkers program in August 2009.
• The latest Institute for Supply Management data shows that U.S. manufacturing in February grew at the fastest pace in almost seven years.
• The U.S. unemployment rate unexpectedly dropped to a nearly two-year low of 8.9% in February, according to the latest report from to the U.S. Department of Labor. And the number of Americans filing first-time claims for unemployment benefits for the week ended Feb. 26 fell to a nearly three-year low.

[More from Jon D. Markman: "Million Dollar Question: Will Stocks Keep Going Up?"]

The point is that the industrial companies at the center of this market advance don’t appear to me to be making tops. They’re hiring and stocking up on inventories as retailers continue to move merchandise – $100 a barrel oil notwithstanding.

That’s right. Don’t believe for a second that the stock market bulls are going to throw in the towel just because of some renewed Mideast turmoil and slightly higher crude oil prices. Investors are jumping at their own shadows lately, creating sharp sell-offs that are later quickly surmounted.

Although oil seems high, absolute price levels are never really the problem. Remember that from 2003 to 2007, crude rose from $30 per barrel to $75 per barrel and there was a bull market in stocks all the way. Oil prices only become a problem when they are extremely volatile, preventing companies from being able to plan adequately and to pass along higher costs to customers.

That hasn’t been the case this time around. The summer of 2008 – when oil prices reached a record high $147 a barrel – taught companies a valuable lesson, and now they’re better prepared.

So stick with the current plan: Lean on the manufacturers that have carried the market higher. Stay positive and wait for the storms to pass.

–Jon D. Markman

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Source: Money Morning