NEW YORK (ETF Expert) -- In previous years, consumers spent more money when the value of their 401(k)s and the value of their homes were rising. That goes a long way toward explaining the performance of the third best sub-sector ETF on a rolling five-year basis.
SPDR S&P Retail
annualized at 16.1% over the past five years while the
S&P 500 SPDR Trust
only annualized at 4% between Feb. 1, 2008 and Jan. 31, 2013.
The idea that we tend to spend more when our chief assets are climbing is known as the "wealth effect." There was a time when leading economists estimated that we were likely to spend 3 cents for every $1 gain in stock portfolios as well as 8 cents on every $1 gain of home price appreciation.
The chairman of the U.S.
, Ben Bernanke, still believes in those metrics... at least conceptually. He recently told Congress the Fed's quantitative easing efforts to depress interest rates lead to economic growth via consumer spending as well as business hiring. Even a number of investors must believe in the notion of increased consumer spending, or they wouldn't have bid up the prices on XRT over the last five years.
On the other hand, what if the "wealth effect" offers diminishing returns? The U.S. government (through tax relief) and the Fed (through drastic rate cuts) were remarkably stimulative in the wake of the 2000 tech bubble and the Sept. 11, 2001, attack. Consumers did begin spending and businesses did begin hiring at a modest pace.
In the aftermath of the 2008 real-estate related collapse, the U.S. government added tax relief and billions in government spending, while the Fed reduced rates to 0% and employed electronic money printing to buy U.S. Treasuries.
Consumers have begun spending again, but not in the same manner they did after the 2000-2002 period. Businesses did begin hiring, but nowhere near the levels of job creation after the 2000-2002 period.
If the stimulus measures after the 2007-2009 financial catastrophe have not been as effective at getting businesses to hire or the economy to grow, what does that say about the current state of affairs?
If Congress now chooses to stimulate by refusing to make meaningful deficit cuts and the Fed intends to stimulate by staying the course on its present manipulation of interest rates, will this "de facto" stimulus be enough to enhance the economy significantly? Conversely, is 2% GDP with labor force participation rates near 30-year lows the best we should expect?
If there is a silver lining at all, it is for investors. One can anticipate that any deficit cutting arrangement will be the furthest thing from austerity, at least in the short term.
Similarly, the Fed has been emboldened by its quantitative easing, and will not choose to risk recessionary pressure by exiting the strategy anytime soon.
Stock assets may get whacked for any combination of reasons, from eurozone debt troubles in Spain or Italy to another debt ceiling showdown in the U.S. to lower corporate profits to sub-par economic data to generic or seasonal profit-taking.
Yet, one should still look to pick up "faves" on pullbacks until and unless rising rates genuinely alter the relative attractiveness of stock shares.
Stock investments that could outperform
whether rates remain the same or even rise include "Big Pharma" and Internet mainstays. Yep, as surprising as it sounds I'd go right to the top of the five-year leaderboard on any pullback.
Realistically, pharmaceuticals aren't particularly sensitive to economic changes, interest rates or household debt. I would favor
PowerShares Dynamic Pharma
Market Vectors Pharma
First Trust Internet
may see a bit of volatility, yet there's always demand for wide moat winners like the
of the world. A
in FDN would pique my interest.
In contrast, real estate via
iShares FTSE NAREIT Residential Real Estatet
and retail via XRT would be less likely to handle any rate sensitivity. While I don't foresee much in the way of significant rate increases in 2013, it still might be beneficial to rotate out of these Fed-fueled superstars.
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.
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