ETF Expert

Stock assets "typically" bottom about halfway into a "typical" recession. And then, stocks historically run an average of 23% over the 6 months that follow.

The questions then become… "How typical is the current recession?" And, "When will we reach the halfway point?"

A relatively optimistic view might peg negative growth for the U.S. economy in only the first and second quarters of 2008. That would peg the halfway point at March 31.

Yet one should expect a rash of volatility in the earliest part of April should we actually get negative GDP for Q1. (Of course, we’d also receive more economic stimulus from the Fed.)

It’s reasonable to surmise, then, an absolute bottom for stocks to form in mid-April/early May. It is also reasonable to expect, then, the markets to "go after" intra-days lows of S&P 1270 and Dow 11500. Those numbers are consistent with an actual bear market.

The S&P 500 has fallen a bearish 20% 9 times in the last 50 years. And we haven’t yet seen the S&P 500 close 20% below its highs to mark "numero 10."

That said, we must keep in mind the "atypical" amount of support that the U.S. economy is receiving and will continue to receive in 2008. Congress, the Federal Reserve and foreign wealth funds are all combining to act as the imperfect stimulus storm.

Indeed, stocks are more likely to reassert themselves now that they are undervalued. Jeffrey Ptak for Morningstar is so confident of the market’s depressed value, in fact, that he sees a 48% total gain for the Dow Industrials to 18500 in 3 years.

So let’s say… you accept the probability. And let’s say… you are not willing to accept the opportunity loss that comes with being a "perma-bear." (Note: A Perma-Bear is one who always has a reason for stocks falling rather than rising.)

Where should one invest? The iShares Dow Jones Select Dividend Index (DVY) is only trading about 5% above its closing low on January 23, and it currently offers a 3.65% yield. Long-term investors would be smart to snap up some dividend-rich shares of DVY.

If you are scared by stock market volatility, but disenchanted by low-yielding bonds, the iShares S&P U.S. Preferred Stock Index (PFF) may be your answer. PFF offers a yield north of 6%, offsetting the bulk of one’s depreciation concerns. It pays the income stream monthly. And if financial companies lead stocks out of the doldrums, the capital appreciation potential for PFF would be enticing. (Read more about preferred stocks here.) 

Emerging markets may seem overblown to some folks. Not to mention… bubblicious. But a diversified approach in limited amounts to the Claymore BRIC Fund (EEB) gives you a piece of Brazil, Russia, India and China. Currently trading 18% off its highs, a "little nibble might do ya."

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.