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Bad Economic News and Stock ETFs

NEW YORK ( ETF Expert) -- In recent weeks, stock market volatility has been rising due to uncertainty surrounding whether or not the Federal Reserve would curb its money-printing-for-bond-buying program. Yet, this week's data, coupled with comments by Fed officials, should have assuaged fears related to the tapering of those bond purchases.

For example, U.S. manufacturing data via the Institute of Supply Management (ISM) logged its worst reading in four years. Similarly, the folks at Bespoke presented research that showed positive economic surprises at a 15-year low. Who is going to claim that the economy is on solid footing with stats like these?

Meanwhile, a governor of the Federal Reserve's board publicly expressed that the 7.5% rate of unemployment understates the scope of the unemployment dilemma. Similarly, Fed Bank of Atlanta President Dennis Lockhart reaffirmed the central bank's commitment to emergency stimulus.

So why have erratic price swings persisted into June? Why is the CBOE S&P 500 Volatility (VIX), also known as the "fear gauge," still pushing higher?

Those that have been looking for clues may not need to look much further than Japan. The idea that massive quantitative easing can cure all stock ills has already taken a super-sized hit in the world's third largest economy. Both WisdomTree Hedged Japan Equity (DXJ) as well as iShares Japan (EWJ) have corrected more than 10% from their respective highs in May.

If instability in Japanese equity markets is any guide, the idea that bad economic news is a good thing may not last. Granted, the Federal Reserve may remain active in the manipulation of interest rates. However, investors may someday require evidence that the Fed policy has benefits beyond the rate-inspired recovery in real estate. Either that, or the Fed might need to promise an elixir with more potency than the currently prescribed dosage of $85 billion per month.

How should ETF enthusiasts approach the current market headwinds? For one thing, recognize that selloffs, pullbacks and corrections are normal components of any market. The fact that the Dow went 21 consecutive Tuesdays with a gain, or the fact that the S&P 500 had not fallen 5% at any time in the first five months of the year, or the fact that stocks avoided a 10% corrective phase for more than a year and a half, these events represented atypical patterns.
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