In light of this year’s rally and the rate of economic growth that we expect ahead, we now think that U.S. equities are fairly valued, and the pace of market appreciation is likely to slow.
Additionally, many of our favorite leading economic indicators (LEIs) are now suggesting a more cautious stance. While our base-case scenario is still constructive, we think downside risks have increased.
We are concerned the markets may have become too complacent. Though the U.S. stock market is near all-time highs, some of our favored economic indicators have weakened.
Yields Held Down By Slow Growth
For example, the six-month average for the LEIs for all the countries participating in the Organisation for Economic Co-operation and Development and the six largest emerging countries (OECD+6) has deteriorated significantly.
While the rate of growth for the U.S. LEIs has slowed, we think it is the slowing growth rate of the global economy, not just the U.S., that is holding long-term interest rates down.
Overall, this weakening suggests sluggish economic growth ahead, and any economic deterioration will likely make equity markets more vulnerable.
As a result, we think investors may benefit from ETFs that offer the ability to participate in equity market appreciation, but that tend to exhibit significantly less risk than the broad equity market.
These types of ETFs can often provide a relatively defensive way to participate in equity market upside and generate returns through current income, while taking on less risk than global equities.
There are several options in this space, including the iShares Morningstar Multi-Asset Income ETF (IYLD), the SPDR SSGA Income Allocation ETF (INKM) and First Trust’s Multi-Asset Diversified Income Index Fund (MDIV).
Chart courtesy of StockCharts.com
At the time of writing, Stringer Asset Management held IYLD and MDIV among its universe of ETFs included in its suite of ETF Portfolios. Stringer Asset Management is a Memphis, Tennessee third-party investment manager and ETF strategist. Contact Stringer Asset Management at 901-800-2956 or at [email protected]. For a complete list of relevant disclosures, please click here.