Clients: "Was it a bottom, Gary?" "Is it over?" "Should we sell into the rally?" "Should we buy some stock ETFs… any stock ETFs?"
Media: "Was it a bottom, Gary?" "What are you buying today?" "What stock ETFs are going to beat this bear?"
I didn't get these kind of phone calls in October of 1987. Then again, I was a fresh-faced lad living in Taiwan at the time. My larger responsibilities involved teaching and transcribing English to executives in the Asian securities markets.
Though the phone rings off the hook, and the e-mails flood my "Inbox," I find it ironic that nobody asks a different question; that is, what might be the best risk-reward investment?
Granted, I love the simplicity, transparency, cost structure and intra-day trading of exchange-traded stock funds. Yet the recession will impact corporate earnings and consumer spending more than anyone initially projected.
So while stock markets should stabilize over the next few months, recession investing requires incremental purchasing over time. An "all-in" mindset based on a likely bottom at Dow 7800 doesn't mean that one should try to win big with capital appreciation alone.
The strongest risk-reward relationship rests with the return of capital plus the opportunistic yields/interest/coupons/dividends of 8%-10%. Preferred share ETFs and investment grade bond ETFs may provide tremendous safe harboring with annual yields that stock investors typically pursue.
Need proof? Take a look at the round-trip recovery efforts of stocks from the start of the "worst week in history" on 10/6/08 through the present.
As impressive as the 10%+ resurgence of the S&P 500 (SPY) was on 10/13, it still finds itself down 10% more than it was going into Monday, 10/6/08. Meanwhile, investment grade bonds vis-a-vis the iShares Investment Grade Bond Fund (LQD) is down only 2.5%. And it's yield is roughly 7.5%!
Think about this now. Recession or no recession, are the highest rated companies with the highest quality debt going to go out of business entirely? If not, you'd have to believe that LQD would appreciate as the credit crisis fears turn to rational, recession-based investing. And LQD would deliver a decent yield. Double-digit gains going forward on A-rated bonds? That's highly probable.
Meanwhile, the PowerShares Financial Preferred (PGF) had fallen to incredibly low levels based on the possibility that fixed income offerings of U.S. banks might not pay at all. Every bank in the U.S. going under? That's what the panic selling priced in.
And then came the explicit guarantee by the U.S. government that it would not let the biggest banks falter. They've announced the intent to buy the preferred shares of banks around the country. Hey, now that's about as close to a guarantee for preferred share investors who want high yields and a modicum of appreciation.
PowerShares Financial Preferred (PGF) jumped 15% to the S&P 500's 10%+ historic "In the Black Monday." And here on Tuesday, as the market meanders in a directionless manner, PGF is up another 14% as I type. If it holds, it will have recovered everything that it had lost from the worst week in history. (And it will still be paying a 10% yield at a price point of 14.)
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.