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The Slog Continues
Monday, December 05 2011 | 05:01 PM
Chief Investment Officer,
YOUR SOURCE FINANCIAL (RIA)
|By now you've read a dozen articles ripping into the Friday's jobs data. The big bone of contention of course was the extent to which the decline in the headline rate dropped to 8.6% due to a large contraction in the labor force.
Whether you call it new normal or something else this is the middling, sluggish US economy continuing to unfold. A few years ago there was a mix of complacency that the then credit crunch wouldn't be that big of a deal which then gave way to serious fear, maybe even terror, that this was the end times in terms of the social fabric of the society.
Sluggish and/or middling has been my base case the whole time for several reasons and I expect that will continue. Obviously I am biased to seeing my thesis as playing out over the last few years and continuing to play out. If this turns out to be the case that does not mean some equities won't still do well.
If there is an economic condition where GDP growth is sluggish or perpetually teetering into a recession we know that certain defensive stocks tend to do well; usually staples, healthcare, utilities and ma bell telecom (with those last two be careful when interest rates are going up).
Year to date the S&P 500 is down a little over 1% while long time client holding Philip Morris International (PM) is up about 30%. Going a little broader the Staples Sector SPDR (XLP) is up a little over 8% which combined with XLP's yield is close to an 11% return--pretty good for soda and diapers. The Utility Sector SPDR (XLU) is up almost 11% on a price basis plus then it's 3.8% yield. The Healthcare Sector SPDR (XLV) is only up 6% but 7% ahead of the benchmark is noteworthy and XLV kicks in a little yield too.
Obviously the albatross around the market's neck has been and I believe will continue to be the financial sector. At this point the Financial Sector SPDR (XLF) is down 19% for the year and while I don't think it can drop 20-30% every year forever, I think it will be a long time before there is sustained price appreciation which contributes to the top down idea that the SPX will have a hard time making meaningful progress without the financial sector.
One of the reason's I prefer top down is that I think it makes the job much easier to do. If the above scenario is right then that means finding a domestic financial stock that skyrockets becomes much harder to do than in a year where XLF goes up by 25%.
Sectors like staples and the others mentioned above can be populated in the portfolio with domestic stocks in this scenario. The other sectors, like financials, would be a good place to look for foreign exposure either with individual stocks or ETFs. For example I am favorably disposed to quite a few countries for the long term like Australia (out temporarily as I have been disclosing for months), Chile and Norway.
There are individual stocks from these countries in the sectors that I think should be avoided in the US, like financials, and the ETFs for these countries have decent weighting in financials as a way in.
Going the individual stock route requires bottoms up research and monitoring of course and going the ETF route requires looking under the hood to understand what is in the fund and taking time to monitor the countries themselves and that is a lot of work. However if the US turns in another sub par decade (new decade to date the SPX is up 10.46% so you be the judge) and some of these other markets can again muster close to normal returns then the effort put in will not only have been worth it but could be (financial) life changing or better yet; (financial) life sustaining.
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