ETF Expert

Will the housing downturn slam the U.S. economy? Will borrowers default in record numbers, causing more lenders to go under? Will competent lenders make it impossible for anyone to get a loan and, consequently, hamper economic growth going forward?

The Federal Reserve was called upon to make its beliefs known today. Investors were hoping for the Fed to move more to the center; that is, investors wanted Chairman Bernanke to formerly announce a neutral stance between the risk of inflation (the impetus behind raising interest rates) and the risk of economic stagnation (the impetus for lowering rates).

The Federal Reserve blinked, but hardly budged; specifically, they maintained that inflation is still the predominant concern and that moderate economic growth, risks notwithstanding, will likely continue.

Yes, even with a housing slump. Yes, even with a credit crisis. "Yes, yes, yes… the economy will be fine," expressed the Federal Reserve in so many words.

The reaction over the next hour and forty-five minutes was erratic. The Dow immediately sold off 130 points. Then, the benchmark moved 240 points higher, leaving the Dow up 140. In the last half hour, those 140 points evaporated and… with just 5 minutes to go… the Dow managed to climb 35 points by the closing bell.

Maybe the Federal Reserve Board’s thinking went a little something like this: The current housing slump is just an irritation, not an open wound. After all, the U.S. had its biggest housing upturn in the middle of the 2001 recession. So then, we have every reason to believe that continued economic expansion can occur during a housing downturn.

Unfortunately, the housing market and recent credit crunch can’t improve at the current interest rate level. That’s why financial stocks, as undervalued as they may be, are still going to struggle. And, in fact, until the struggle becomes outright painful, financial stocks will remain laggards.

Short-term traders might play the pain by investing on the dark side. The ProShares UltraShort Financials (SKF) will profit if lenders can’t/won’t make money available and if borrowers find it difficult to repay/refinance/borrow/spend. The ProShares UltraShort Financials (SKF) pursues twice the inverse of the Dow Jones Financials Index.

Longer-term, however, the Fed will become more accommodative. This is because, in the not-so-distant future, the Fed will be forced to do more to address an ailing financial sector in the U.S. economy.

What should happen when the Fed becomes more accommodative? What will occur when the Fed leans more towards a neutral stance or mentions the possibility of an easing of interest rates? Look for the Financial Select Sector SPDR (XLF) to sound the bull horn. At that time, the worst performer may indeed become the best performer.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.