This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Even the Threat of War Fails to Lift Income ETFs

NEW YORK ( ETF Expert) -- The list of uncertainties for the U.S. stock market is expanding. Pending home sales have declined for two consecutive months. Consumer spending is flat. The U.S. government is gearing up to debate the debt ceiling yet again. More immediately, Congress may authorize a military strike on Syria.

Perhaps ironically, I do not see conflict in the Middle East as a game changer, as oil prices will ultimately behave themselves.. Nor do I think investors benefit from overplaying a "September is the worst month" card. The real threat to stocks? Time itself.

It has been nearly two full years since the U.S. stock market has experienced a 10% correction -- since the world's central banks implicitly and explicitly pledged extreme levels of monetary stimulus. Now the clock appears to be running out on the U.S. Federal Reserve's promise, as many forecast the Fed will put the brakes on its bond-buying binge. Housing is already struggling in the wake of higher lending rates. From my perspective, the decline of rate sensitive funds like iShares DJ Home Construction (ITB) dramatically increases the probability of a 10% pullback in broader U.S. equities.

Courtesy of

Perhaps ironically, the general trend toward abandoning rate-sensitive assets of all stripes has barely let up since May. One might have surmised that the specter of war would boost the safe haven status of U.S. Treasuries, international treasuries, corporate credit, munis as well as dividend producers from REITs to high-yielding equities. Alas, the prospect of bombing President Bashar Assad in Syria has done nothing to curb the exodus from income-oriented holdings.
Strong Support In Congress For Syrian Strike Did Not Bolster Rate-Sensitive ETFs
Approx 1-Day
Vanguard Extended Duration (EDV) -2.3%
iShares 20 Year Treasury (TLT) -1.4%
SPDR Select Utilities (XLU) -1.2%
iShares Cohen Steers Realty Majors (ICF) -0.9%
SPDR Barclays International Treasury (BWX) -0.8%
Vanguard Telecom (VOX) -0.6%
iShares 7-10 Year Treasury (IEF) -0.6%
PowerShares National Muni (PZA) -0.5%
iShares DJ Select Dividend (DVY) -0.4%
iShares DJ Home Construction (ITB) -0.2%
S&P 500 SPDR Trust (SPY) 0.4%

Fed Chairman Ben Bernanke and his colleagues must be horrified. Neither the threat of war in the Middle East nor the strong possibility of a drawn-out debt ceiling fight is persuading investors to hold onto their income holdings. Even foreign countries are dumping U.S. treasuries. In effect, the Fed may have wanted to exit quantitative easing gracefully, but now the Fed will only contribute to further increases in lending rates if it slows bond buying significantly.

So it won't. That's right... the Fed will continue to talk the talk, while refraining from walking the walk. Either there will be no action whatsoever at the mid-September meeting, or the action will be so minimal that the main talking points will be to emphasize the smallness of the "taper." The Fed is purchasing $85 billion per month now. If the Fed takes any serious step towards curbing bond purchases, it risks a genuine stampede to leave rate-sensitive assets, a "double-dip" in housing and the total erosion of the "wealth effect."

The Fed understands that its monetary policy created a recovery in housing as well as new highs in the stock market. It's not like Fed members will be comfortable letting longer-term rates get beyond their influence, reversing the wealth effect that came from gains in real estate and investment accounts.

Other than the need to remove some of the froth from our collective interest rate addiction, then, it's difficult to imagine any reason for the Fed to change course. After all, the wealth effect did not genuinely translate into meaningful employment gains and members of the Fed know it. Chairman Bernanke knows that the 7.4% headline unemployment rate would actually be 9.4% when one adjusts for labor force participation data; Bernanke knows that 70% of the new hires in 2013 are part-timers.

In the end, prepare for the 10-year yield to stay below 3%. If it gets any higher than that, expect QE to continue at the same levels, if not an increase in what the Fed purchases. In fact, do not be surprised if the 10-year works its way back down to 2.5% or 2.25% by year's end. Granted, it will take a change in mindset about what is safe. Yet, institutional money flow could shift on a dime should stock ETFs correct significantly or if a weak employment report gives the Fed opportunity to backtrack.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

Gary Gordon reads:

Real Clear Markets
Jeff Miller
Charles Kirk
On Twitter, Gary Gordon follows:

Jonathan Hoenig
Doug Kass
Hard Assets Investor

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.70 -0.60%
FB $101.91 0.90%
GOOG $681.92 -0.32%
TSLA $150.47 4.73%
YHOO $26.75 -1.30%


Chart of I:DJI
DOW 15,660.18 -254.56 -1.60%
S&P 500 1,829.08 -22.78 -1.23%
NASDAQ 4,266.8370 -16.7550 -0.39%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs