The capital goods sector is a sector category that comprises the stocks of all companies dealing in the provision of industrial products and services used in manufacturing and construction. Belonging to this class, are companies that deal in construction and engineering, autos, auto components, electrical equipment, conglomerates, marine and building products.
The performance of the stocks of the capital goods sector in the stock markets largely depends on the forces of demand and supply of building construction, such as industrial, commercial, and residential, and also the demand for manufactured products. When the economy slows down, and the demand drops, the activities of this sector will be significantly effected in regards to reduction in production and deferment of expansion.
The capital goods sector has several subsectors that usually experience bullish growth cycles in the stock market for years before the bearish sentiment sets in. In particular, homebuilding and aerospace. Other subsectors that also provide stable streams of income, in a bullish stock market environment, are pollution control and Engineering & Construction stocks.
The capital goods sector undergoes life cycles that result in different growth phases of the subsectors. The phases of the growth cycle include accelerating growth, decelerating growth, accelerating decline and decelerating decline. Therefore, investors consider capital goods sector stocks in relation to their trends and growth cycle’s phase carefully before making any investment decisions.
The stocks of companies in the decelerating decline and accelerating growth phases have been noted to have the best performance and are given higher multiples considering their expected growth. The index of the capital goods sector in the stock market can be used to evaluate the performance of the economy, because it captures the policies of governments, companies, and individuals.