Has anyone given consideration to just how remarkably poor 1.8% GDP in the 1st quarter really is? In spite of unprecedented levels of monetary stimulus — emergency levels of quantitative easing that have been increased on a regular basis since 2009, rather than tapered — the U.S. economy continues to slow every year.
Not surprisingly, the bad news is benefiting market participants. After all, the Federal Reserve will not reduce its bond buying when the exceptionally modest economic growth is attributable to ultra-low rates alone. Cue a rate-sensitive asset buyback and celebrate the 10-year yield’s eventual reversion back to an intermediate-term 50-day trendline. (Take note of the fact that I am talking about 2%.)
From a technical perspective, it is intriguing to see the resilience of the S&P 500 SPDR Trust (SPY) at its 100-day moving average. The bounce suggests the potential for broader market stock ETFs to weather summertime squalls.
On the flip side, I am not seeing the benefit of over-weighting “strong economy” sector ETFs (e.g., technology, energy, materials, etc.). For example, iShares DJ Technology (IYW), SPDR Select Energy (XLE), SPDR Select Basic Materials (XLB), as well as SPDR Homebuilders (XHB) are all below respective 100-day moving averages. In contrast, more defensive equities in SPDR Select Healthcare (XLV), SPDR Select Consumer Staples (XLP), Market Vectors Retail (RTH) as well as the utility-like pipeline partnerships via UBS E-TRACS Alerian MLP (MLPI) are all above their respective 100-day trendlines.
I believe investors have to a careful here. “Window dressers” often buy stocks at the close of quarters to appear to clients as though they have been holding the right positions all along. In other words, stock volatility will not subside due to a single GDP report.
You might consider dollar cost averaging into the defensive equity ETFs that I listed above. However, with the markets likely to punish scores of corporations in the upcoming earnings season, patience may be virtuous.
On the income side of the ledger, ETF enthusiasts would be wise to recognize funds that ultimately mature like individual bonds. For instance, Guggenheim’s BulletShares series offers a reasonably safe way to access short-term high yield; Guggenheim BulletShares High Yield 2016 (BSJG) as well as Guggeheim BulletShares High Yield 2017 (BSJH) may be situated in the sweet spot of the 0-5 year horizon. Municipal bond investors can look at similar maturities with iShares 2015 AMT-Free Muni (MUAD) and iShares 2016 AMT-Free Muni (MUAE).