We can all agree that the first 3 months were wonderful for risk takers. What’s more, we can all feel good that U.S. stocks ran at their fastest percentage clip since 1998.
Of course, what happened in the summer of 1998 is pretty intriguing as well. The infamous hedge fund Long-Term Capital Management helped exacerbate the spread of an Asian currency crisis. The S&P 500 and Dow fell a tad shy of the 20% required for a bear market call, though the NASDAQ gave up 1/3 of its value. And it wasn’t until the coordinated actions of central banks/U.S. Federal Reserve that confidence in equities returned.
Perhaps ironically, 2011 was not entirely dissimilar. Last year, the S&P 500 and the Dow also fell a tad shy of the 20% bear call, while foreign stocks and emergers gave up 1/3 of their value from the top. This time, it was the potential worthless nature of sovereign debt rather than sovereign currency. Other than that… there may be more similarities than differences between ’98 and ’11.
Naturally, this is 2012. Stocks are much cheaper on a P/E basis than they were in 1998. Spreads between earnings yields (E/P) and U.S. treasuries are much wider. What’s not to like?
Primarily, I am not particularly fond of the amount of uncertainty coming down the pike. I’m neither bearish or bullish here, but I recognize the probability that the markets may have a difficult time with “priced-in” good news and a heavy dose of the unknown. That is why I am overweight income producers — from high-yield corporates to pipeline partnerships to CEFs to dividend-producers.
Consider the following ambiguities:
1. The U.S. Economy. Gas prices are rising. Real estate has yet to start climbing. The outcome of universal health care won’t be known until the summertime. Control of the White House as well as Congress is at stake. And the direction of tax policy is completely up in the air.
2. Corporate Profits Are Slowing. Analysts are projecting that Jan – March earnings growth may only hit 1%. Going forward, business profitability is equally suspect, particularly with the economic slowdown overseas.
3. Europe’s Contagious Debt Crisis. Spanish bond yields have been climbing. Portugal faces default concerns. Inter-bank lending rates between European banks remains elevated. And the best that anyone can say about the region’s economy is that it may only suffer a “mild recession” in 2012.
Again, these are challenges to be met, not bull-busting “insurmountables.” Nevertheless, I am looking at the near-term as an opportunity to garner more income production.
For energy pipeline partnership exposure with higher-yields, you might look at Yorkville High Yield Alerian (YMLP). For diversified access to leveraged income production, PowerShares CEF Income (PCEF) works nicely. Moreover, I still believe in dividend aristocrat exposure via SPDR S&P Dividend (SDY), particularly for tax-deferred investing.
High tax-bracket folks with taxable accounts might shift some dollars into PowerShares Insured National Muni (PZA). And the monthly income stream from iShares High Yield Corporate (HYG) is a terrific risk-reward asset in the current environment.
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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.