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3 ETF Investing Themes For A Wobbly U.S. Bull

The Fed explains that it is serious about raising interest rates in 2015. Janet Yellen’s Fed expressed confidence that in spite of the failure of QE3 and ZIRP to influence rising prices, those rising prices should gradually reach the target of 2% in a tightening cycle. There are perhaps three investment themes that make sense at this point in the late stage U.S. bull market. Presumably, the Great Recession ended in June of 2009. Three months earlier on March 9, the stock market anticipated the modest recovery that is still intact. In essence, stocks began to rally well in advance of the actual turnaround in the U.S. economy. Similarly, the 10/09/2002-10/09/2007 bull market ended roughly three months before the start of the mammoth economic collapse (12/2007). In a sense, stock barometers were (and are) leading indicators of things to come. For those who wish to believe that stocks will avoid a 20%-plus bearish setback on a combination of monetary policy gamesmanship and perceived economic strength, they might want to consider the history of recessions as well as the history of central bank stimulus. With some 50-odd contractions over the last 225 years, one should expect expansions to falter, on average, every four-and-a-half years. The current recovery? Five-and-a-half and counting. It is also worth noting that past recessions required the U.S. Federal Reserve to lower overnight lending rates by 3%-4% to combat recessionary forces. Even if the Fed manages to get the Fed Funds rate up to 0.5% in 2015 – even if policymakers succeed in pushing it up to a “whopping” 1% in 2016 – wouldn’t they have to return to 0% and more quantitative easing (QE) when the inevitable economic contraction returns? Central bank QE as well as zero percent interest rates (ZIRP) have lowered the costs to service higher household and government debts ; they have increased the rewards for risk-taking in real estate as well as as market-based securities. Yet these policies have not done a great deal to assure prosperity, as median household income is lower than it was in the heart of the Great Recession. Equally troubling, survey stand-out Gallup determined that business closings have exceeded the number of new businesses created each year since 2008. According to some analysts , the opening/closing business data may even be responsible for the Bureau of Labor Statistics ( BLS ) overstating job growth by as much as 600,000 jobs annually. Nevertheless, the Fed explains that it is serious about raising interest rates in 2015. Stock bulls used to relish this type of optimism, particularly with respect to jobs. (You might want to ask the workers at Schlumberger (NYSE: SLB ), IBM (NYSE: IBM ), Haliburton (NYSE: HAL ), American Express (NYSE: AXP ) and U.S. Steel (NYSE: X ) if they share the sentiment.) And then there is the reality that inflation has remained below its 2% target for 30-plus months. Janet Yellen’s Fed expressed confidence that in spite of the failure of QE3 and ZIRP to influence rising prices, those rising prices should gradually reach the target of 2% in a tightening cycle. Really? Do investors even recognize that the Fed projected far greater economic growth than has actually occurred in every single year since 2008? Knowing that, why would anyone have confidence in a Fed expectation of 2% inflation? There are perhaps three investment themes that make sense at this point in the late stage U.S. bull market. First, the entire globe is in the process of stimulating economic growth through conventional and/or unconventional measures. Why fight their central banks? As bond yields around the world continue moving lower, the activity only makes longer-term, dollar-denominated debt more attractive. If you want to buy the proverbial dips, you should probably be buying the bond dips on relative value . Consider the iShares 10-20 Year Treasury Bond ETF (NYSEARCA: TLH ), the Vanguard Long-Term Bond ETF (NYSEARCA: BLV ) and closed-end muni fund like the Nuveen Municipal Opportunity Fund (NYSE: NIO ). The second theme involves buying stimulus-driven stock ETFs. The WisdomTree India Earnings ETF (NYSEARCA: EPI ) has been a tremendous beneficiary of its own country’s unexpected rate cut activity, while the iShares Currency Hedged MSCI Germany ETF (NYSEARCA: HEWG ) should benefit from the markedly lower euro and the negligible German bund yields that push investors into German equities. Third, investors should continue to hold prominent U.S. equity ETFs for as long as they are still working for them. I still maintain an allegiance to the Health Care Select Sect SPDR ETF (NYSEARCA: XLV ), the iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ) as well as the Vanguard High Dividend Yield ETF (NYSEARCA: VYM ). If any of these positions break below a 200-day moving average, however, I would insure against further depreciation by selling the position or increasing exposure to the index that my colleague and I created, the FTSE Custom Mutli-Asset Stock Hedge Index . One can already see the benefits of multi-asset stock hedging over 1 months, 3 months, 6 months and 1 year, where the combination of certain currencies, commodities, foreign sovereign debt and U.S. bonds are achieving desirable results. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

Are Rate-Sensitive ETFs Suggesting Economic Weakness Ahead?

I am baffled by the economic acceleration certainty that nearly every respected voice has endorsed. In spite of the rosiest government data on jobs and GDP, which ETF asset classes proved most resilient in a month of volatile price movement? Utilities and REITs. The more the public is being told about the inevitability of rate increases, the greater the momentum for proxies like XLU and VNQ. Lost in the bull market euphoria is the reality that economists have been dead wrong about the direction of asset prices, particularly bond prices. Last December, when 55 of the most prestigious economists across a wide range of institutions had been polled by Bloomberg about where the 10-year yield (3.0%) would end the year, each of the 55 professionals anticipated higher rates. The average of those estimates? 3.41%. And yet, the 10-year will finish the year closer to 2.25%. That is one heck of an astonishing miss for the entire professional community. This December, polling of economists has produced an average forecast for the 10-year yield at 3.0% by the close of 2015. In other words, they expect intermediate term rates will climb in 2015, and yet, the projections merely approximate where 2013 ended. Even if the recent crop of poll respondents are correct this time around, what does this “non-normalization” of rates tell us about the highly touted strength of the U.S. economy? For all the hoopla, I am baffled by the economic acceleration certainty that nearly every respected voice has endorsed. Will Q4 gross domestic product (GDP) be as robust as the 5% in Q3? Not likely. Will Q1 2015 be better than the average of 2.1% sub-par growth that has existed each year since the Great Recession ended? Probably not. For one thing, lower bond yields have been warning U.S. investors that the world’s stagnation alongside regional recessions will eventually weigh down the U.S. It is one thing to pretend that the U.S. is a self-contained economic island, yet quite another thing to ignore the reality that close to 50% of corporate profits come from overseas. Moreover, there are a variety of potential crises that could sap the world (and yes, the U.S.) of economic demand, from a disorderly slowdown in China to an emerging market credit collapse to a second iteration of a euro-zone break-up scare. Need proof that scores of investors remain unconvinced by the notion that all is perfect in stock-land? In spite of the rosiest government data on jobs and GDP – in spite of strong retail sales as well as consumer confidence readings – which ETF asset classes proved most resilient in a month of volatile price movement? Utilities and REITs. Are The Bets On Lower Rates Still Continuing? MOM% SPDR Select Sector Utilities (NYSEARCA: XLU ) 9.0% iShares DJ Utilities (NYSEARCA: IDU ) 8.7% Vanguard Utilities (NYSEARCA: VPU ) 8.6% iShares Cohen Steers Realty Majors (NYSEARCA: ICF ) 4.2% Vanguard REIT (NYSEARCA: VNQ ) 4.2% SPDR DJ REIT (NYSEARCA: RWR ) 4.1% iShares DJ Total Market (NYSEARCA: IYY ) 1.0% If an investor is looking for modest growth in an area less tied to the economy, he/she may journey to the consumer staples segment or the health care sector. They are frequently identified as “non-cyclicals” since they represent things we need in good times and bad. And if an investor is looking for more total return in areas less tethered to economic well-being, he/she often travels to utilities and REITs. The exception to that rule? If rates are expected to rapidly rise across the yield curve, an investor would tend to shy away from the rate sensitivity associated with utilities and REITs. That’s not happening. In fact, the more the public is being told about the inevitability of rate increases, the greater the momentum for proxies like XLU and VNQ. The price-ratios for XLU:IYY as well as VNQ:IYY are at or near their highest points of 2014. I am not advocating that investors abandon economically sensitive stock assets let alone chase yield-sensitive stock segments. On the other hand, just as I recommended throughout 2014, I believe it makes sense to remain committed to longer-term bonds in funds like iShares 10-20 Year Treasury (NYSEARCA: TLH ) as well as lower volatility stocks across the sector spectrum. One of my largest client holdings, iShares USA Minimum Volatility (NYSEARCA: USMV ), is diversified across all of the economic sectors; the top 3 segments are health care, financials and information technology. What makes USMV particularly attractive in the current environment? The equities have lower volatility properties relative to the U.S. market at large, offering the possibility that losses during declining markets will be less dramatic. Similarly, gains in rising markets will emanate from exposure to strong economy stock sectors as well as weaker economy stock sectors. Click here for Gary’s latest podcast. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.