Looking beyond the recession

Despite a weak economy, railroad, trucking and homebuilding stocks are faring well, perhaps a sign that investors are banking on a recovery.

By Alexandra Twin, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Despite overwhelming signs that the economy is now in a recession, some investors are increasingly pondering another 'R' word: Recovery.

Although a turnaround appears to be far off, there are some early signs that Wall Streeters may be already positioning themselves for a rebound.

For example, a recent spate of bad corporate and economic news hasn't wreaked havoc on the markets, suggesting a floor has been put in place after months of heavy selling.

Additionally, railroad, trucking and homebuilding stocks have been rallying - a surprising occurrence considering those sectors have been among the hardest hit by the credit crunch.

"We're waiting for the economy to start showing it is recovering and that's keeping stocks stable right now," said Ron Kiddoo, chief investment officer at Cozad Asset Management. "But if we don't get some hint by late summer that a recovery is on the way, we could see bad days again."

Last week, Federal Reserve chairman Ben Bernanke and other Fed officials came as close as they have yet to acknowledging the depth of the economic slowdown, with Bernanke telling Congress that a "recession is possible." And on Tuesday, the minutes from the last Fed policy meeting confirmed that many of the central bankers were worried about a recession.

This wasn't much of a surprise to investors, who for months have traded stocks as if a recession is already here.

That belief led to an "all news is bad news" philosophy that saw investors reacting poorly to any economic report or piece of company news that seemed to confirm the worst.

But sentiment seems to be shifting as of late.

"It's still too early to tell," said Thomas Nyheim, portfolio manager at Christiana Bank & Trust. "But I do think that when you have Ben Bernanke, the IMF, and all these strategists saying we are in a recession or about to see one, and the market doesn't sell off much, that tells you something."

The reaction to last week's miserable March jobs report was a good example, said Alan Gayle, senior investment strategist at RidgeWorth Capital Management.

"We lost jobs in every month in the first quarter, the unemployment rate rose and the market managed to look beyond that," Gayle said.

While that reaction was positive, he's concerned about how investors are going to manage to stay positive with more job losses, falling home values and gas prices that are flirting with $4 a gallon. Investors are, after all, consumers as well.

On the upside, exports are strong, some earnings outside of financials will be decent and the market has the support of an aggressive and innovative policy response from Congress and the Fed, Gayle said.

And what's most surprising is that many companies you'd think would suffer the most during a recession are actually among the market's leaders.

Issue No. 1: America's money

Historically among the first areas to recover after a recession, the railroad sector has risen about 14% year-to-date. Other key transportation indexes are all up between 5% and 10% this year, versus a decline of 7.5% for the S&P 500.

And transportation stocks have been moving ahead at roughly the same pace that financial stocks have been declining.

Surging energy prices have hurt profits at airlines, package delivery firm UPS and some of the truckers. Yet, the railroads in general are more fuel-efficient and have lower costs than other forms of delivery, which has helped them. Growing demand for coal and other forms of fuel have helped as well.

"Railroads are picking up business because their cost structure is better than other forms of shipping," Nyheim said. "A company like Burlington Northern has such a wide footprint that its cheaper, for example, to ship coal that way."

The stocks have also benefited from the interest of Berkshire Hathaway head honcho Warren Buffett, who has invested heavily in the sector of late. If Buffett sees something the broader market is just beginning to notice, it wouldn't be the first time.

Homebuilding stocks, also often among the recovery early birds, have been rising too.

But homebuilding stocks were battered so hard last year amid the ongoing housing and credit market crises that analysts say a recovery in that sector is largely attributable to bargain hunting.

"It's been interesting, it's been nerve wracking and it's been encouraging," said Gary Webb, CEO of Webb Financial, referring to the market's recent upswing. "But we won't really know for another few months whether this was the start of a shift in sentiment."


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