Transportation bellwether United Parcel Service (UPS) reduced its full-year profit forecast due to a weak economy. Fast food giant Yum Brands (YUM) experienced declines in earnings as well as revenue. Meanwhile, financial behemoth J.P. Morgan (JPM) managed to cover up waning revenue from mortgages and trading with sleight-of-hand accounting. Yet some folks in the financial media insist that U.S. stocks are soaring on fundamentals.
In truth, profitability and sales across major corporations are both flat. They’re decelerating, much like the global economy. There is only one driver in the U.S. stock car and that’s the Federal Reserve. Â Or as a friend of mine put it yesterday, “The Fed’s not going to taper… you gotta be in stocks!”
Back in late May, when Ben Bernanke first brought up the notion of tapering, I expressed that the chairman was merely floating a trial balloon. There were plenty of folks who disagreed with me; they believed (and maybe still believe) that we are transitioning to an economy that can stand on its own two feet. However, on Wednesday afternoon, Mr. Bernanke back-tracked by serving up more stimulus. Indeed, maintaining a policy of zero percent “overnight” rates while simultaneously gobbling up most of the supply of longer-term treasury debt is not a ringing endorsement for the economic improvement camp.
Regardless of the facts about the macro-economic picture or the facts about the micro-economic corporate picture is the reality of the investing picture. Specifically, investors are as addicted to ultra-low interest rates as are consumers. And when you’re addicted to something, nothing else matters. For example, you could hardly find an advocate for Japanese equities until the Japanese government/Bank of Japan (BOJ) proposed a quantitative easing program that is effectively 3x as large as what the Fed is doing. Ever since, one of the hottest investments on the planet has been WisdomTree Japan Hedged Equity (DXJ).
Similarly, there’s an argument to be made that China has been responsible by refraining from the loose monetary policy game. Some might even describe the People’s Bank of China (PBOC) as having tightened the reins. Recent economic data have been so weak, however, that bad news is becoming good news. Intrepid investors who see China stimulus in the near future began revisiting funds like SPDR S&P China (GXC) in late June.
Aggressive ETF enthusiasts may choose to invest in assets solely based on which countries or regions are engaging in the most stimulus or the most rate manipulation. For those folks, there may be nothing more attractive than the S&P 500 SPDR Trust (SPY) or WisdomTree Japan Hedged Equity (DXJ).
For myself and for clients of Pacific Park Financial, Inc., however, I’m playing it safer with defensive equities. I like SPDR Select Sector Consumer Staples (XLP), SPDR Select Sector Health Care (XLV), defensive consumer stand-out Market Vectors Retail (RTH), PowerShares Pharmaceuticals (PJP) as well as iShares DJ Aerospace and Defense (ITA). The Dreamliner fire at Heathrow airport aside, assets that are less dependent on investor addiction are less likely to crash-n-burn.