Cramer: These 10 Sectors Make Up for Letdown in Autos, Retail

 | Jul 05, 2017 | 3:18 PM EDT
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Sometimes you have to wonder how the heck this market can stay up at these elevated levels when two of the most important sectors, autos and retail, just can't get out of their own way. Today's no different.

It makes sense to be concerned. We are a service economy with much of it revolving around what we purchase. Today's another reminder as we see whole portions of the auto sector get smashed and the retailers again on the ropes.

The papers are filled with the dramatic decline in auto sales year over year. That's historically been a terrible auguring of things to come. Then today we got the complete collapse of the auto parts retailers led by O'Reilly Automotive (ORLY) , a very reliable company, where management had been expecting 3% to 5% growth in same-store sales but instead they will only be up about 1.7%. That's a gigantic miss, one that caused the company to pre-announce weak earnings and drove the stock down almost 20%, an extreme move, and no doubt a chilling overreaction. But that's how this market has reacted to any retail weakness. We got a real domino effect with the stock of Advance Auto Parts (AAP) plummeting more than 11% and AutoZone (AZO) falling about 9%. That's incredibly strong stuff and, when taken with the slower sales, tends to indicate that the consumer's not spending on cars, period. O'Reilly tried to pin the weakness on weather, but it's obvious there's been some sort of structural challenge to this industry that has led to dramatic declines in what was a very steady group for years and years.

These declines were so ferocious that they rolled over to the aisles of Home Depot (HD) and Lowe's (LOW) , as they are considered to have an auto component. And, speaking of dominos, retail weakness in those stocks quickly spread through the contagion of retail ETFs and again the entire group got clobbered.

For the longest time, this kind of concentrated selling could bring the entire market down, given how linked auto and retail sales are to the entire business of America.

But it hasn't been the case this time around.

Why not?

Because there have been some fundamental changes in the U.S. economy that have allowed the market to blossom without the traditional spurs of retail sales and autos.

To be specific, I see 10 sectors that are responsible for much of the recent advance, and it's worth it to go over them to explain why this market's looking past what has normally been its own Achilles heel.

The 10? Healthcare, travel and leisure, capital goods, oil and gas derivatives, stay-at-home generation, defense, aerospace, housing, banks and e-commerce.

How do I know these? I spend a huge amount of time analyzing the 52-week-high list, and stocks from these sectors either routinely dominate them or have been showing up a great deal of late, making me more sanguine than I would normally be and allowing me not to overlook the auto and retail weakness but put it in a more positive light.

First, there's a major change occurring in how individuals spend their time and money. We have all no doubt gotten sick of the term "experiential" as a reason why people do things, but we can't roll our eyes on such an important trend. There's a sense, particularly among the younger generation, that they don't have much of a yen for material goods. Instead, they want to see and do things. Some of this is no doubt a part of the selfie generation. Basically, they want to take pictures of themselves and post them on Facebook or Instagram. Some of it is from baby boomers who truly feel they have everything they need and want to see the world. Whatever, travel and leisure stocks, everything from hotels and time shares to airlines and cruises, live on the new-high list and with good reason: They all seem to have endless runs of better-than-expected earnings and these industries employ a huge number of people.

We always fret about runaway healthcare bills. They are a fact of life and we all accept that our healthcare system is brutally inefficient. Nevertheless, the medical device, insurance, hospitals, medical records, biotech and prescription drug businesses just keep going great guns. The stalling of the healthcare reform efforts in Congress has just made it even better for the likes of the United Healths (UNH) and the Anthems (ANTM) and the Humanas (HUM) and Centenes (CNC) . They are the huge winners, the Trump trade for 2017 for certain.

We've gotten a surge in capital-goods companies' earnings and I think that's directly related to improving business worldwide. Many of our cap-goods companies realized years ago that they had to diversify away from a slowing United States, and they spread their wings to Europe and Asia and all sorts of emerging markets. It turned out to be a poorly timed diversification strategy -- until, that is, this year. With the rest of the world in recovery mode, heavy-equipment makers are experiencing a nirvana moment.

We know the oil and gas industry is in the dumps. But the companies that use our newfound natural resources, mainly the plastics companies, are experiencing an amazing renaissance. With the cheapest feed stock in the world, the chemical companies that make plastics are seemingly unstoppable.

The consumer's staying at home more than ever. That's because home entertainment has never been better. Whether it be Netflix or video games, or any other diversions that make television only a small part of the menu, it draws people away from going out to retailers and, instead, watching and eating at home.

The world's a more dangerous place and we are doing less to help others in danger than ever before, except, of course, selling them weapons. Our allies plus our own defense budget make for solid earnings prospects from the Lockheeds (LMT) and Northrops (NOC) and General Dynamics (GD) of the world. North Korea's a factor, too.

Closely linked to the defense bull market is that of aerospace, as they often overlap. There's a tremendous order book for all the aerospace companies, something Boeing's (BA) endlessly crowing about, and that's been fantastic for the likes of United Tech (UTX) and Honeywell (HON) and a bunch of smaller suppliers. The orders seem to be accelerating, hence the rapid advance in stock prices.

Housing is an industry that punches above its weight. It accounts for only about 10% of consumer spending, but the demand for housing is off the charts vs. the supply, hence why the overall housing start numbers aren't that strong but the homebuilders endlessly hit the 52-week-high list. That's the same for the businesses that sell into home improvement retailers, even if it doesn't extend to the retailers themselves.

The reason they don't extend? The power of e-commerce, meaning Amazon (AMZN) . With the addition of Whole Foods (WFM) to the fold, Amazon has become almost its own separate category. But there are whole complexes of companies and businesses that are involved in getting product to you, everything from last-mile provider XPO Logistics XPO, to all of the data farm and distribution-center REITs to FedEx (FDX) and UPS (UPS) . It's not all zero sum.

Finally, there is a new addition to the list: the banks. A combination of a commitment by the Fed to raising rates despite low inflation -- something that I thought was affirmed by the Fed minutes released today -- and new rules that allow more capital to be returned to shareholders has created a kind of instant bull market in the group. That's always good for business.

So, it's true, autos and traditional retail may be weak. But these 10 sectors can justify an awful lot of strength, certainly enough to make it possible for the stock market to plow higher even without the usual suspects helping to do the powering.

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