Does anyone really think that the monstrous erosion in homebuilder sentiment and the disappearance of mortgage applications are due to the nasty weather? Perhaps one can attribute the sad state of retailer earnings to cold spells and polar vortexes. One can even consider excusing two months of abysmal payroll data to rain, sleet and snow. On the other hand, if weather had been the main issue for home construction companies, sentiment would have risen on the promise of a sun-filled springtime, not dropped like a bowling ball on a wood floor.
Why the despondence surrounding real estate? It’s the hit to affordability. In 2013, investors and cash buyers scooped up inventory, pushing prices through the clay tile roof. At the same time, Federal Reserve tapering fears sent mortgage costs skyrocketing. The end result? Home prices across 300 U.S. counties are roughly 20% higher than they were at the end of 2012. The increase in the costs of home ownership now “prices out” a large segment of first-timers and dents the prospect of construction adding much to economic growth or employment.
The real estate sector is hardly the only economic segment with significant challenges here in 2014. Recently, I highlighted several potential weaknesses in the U.S. economy. You would have thought I had posted a picture of a hunter killing an endangered owl. How dare I fail to recognize the remarkable recovery in employment? How could I possibly question the resilience of the American consumer? People forget that some of the smartest people on the planet, including members of the Federal Reserve, did not see economic warning signs prior to the credit crisis in 2008; most did not even predict the recession until well after the economy had already fallen apart.
To be clear, I am not predicting an imminent recession. I am not suggesting that the economy is on the verge of self-destructing. I am, however, expressing an opinion that investors have grown complacent about the Federal Reserve’s ability and willingness to provide financial markets with the kind of liquidity that has fueled stocks for years. The process of tapering the bond purchasing, which is not “on a pre-set course,” is likely to be uneven; similarly, erratic economic data points are likely to take on more relevance than they had in 2012 or 2013.
It follows that the best risk-reward scenario today is to embrace investments that gain when the bull stampedes, but also hold up better when sellers knock riders out of the saddle. I often talk about the virtues of owning non-cyclicals like SPDR Select Health Care (XLV), low volatility ETFs like iShares USA Minimum Volatility (USMV) and lower risk country ETFs like iShares MSCI United Kingdom (EWU). Even as the S&P 500 battles to get back to a new 52-week high, these funds have already made the list.
It is true that scores of high-fliers are logging new 52-week highs as well. I might break the 52-week winners down into two categories:
|Sampling of Prominent ETFs On The 52-Week High List|
|Higher Risk Participants|
|First Trust DJ Internet (FDN)||6.3%|
|SPDR S&P Semiconductor (XSD)||6.6%|
|iShares NASDAQ Biotechnology (IBB)||16.9%|
|Market Vectors Egypt (EGPT)||20.3%|
|Lower Risk Participants|
|iSharres MSCI USA Minimum Volatility (USMV)||0.5%|
|iShares MSCI United Kingdom (EWU)||1.7%|
|First Trust Technology AlphaDEX (FXL)||5.5%|
|SPDR Sector Select Health Care (XLV)||6.3%|
While it is my preference to sample from the lower risk grouping where “risk” (e.g., drawdown, daily range, beta, Sharpe ratio, etc.) is in the eye of the beholder, you may prefer to go for the biggest price appreciators. That would be your prerogative. By the same token, I strongly advocate the use of unemotional stop-limit orders on all stock ETFs to minimize the possibility that any selection might turn into a huge loss.