Consumers Are Less Confident, But What Can Investors Do?

For much of 2023, stock market bears have been waiting. With so many potential “bubbles” still intact, their hope has been that sooner rather than later, one or more of them would burst. 

And, with the stock market recently suffering a dip but not a crash, at least through last Thursday’s close, recent economic data provides few new clues. That makes a case for extending the search beyond traditional ETFs to alternatives. 

Higher rates are great for savers, but not for consumers who don’t have a lot of financial assets. Thus, with 30-year fixed mortgage rates sitting around 7.8%, credit card rates north of 20%, and many bond ETFs facing their third straight year of losses, there’s not much joy in the consumer’s version of Mudville from the famous poem “Casey at the Bat.” 

Consumer Confidence Sliding

Last week’s consumer confidence report came in at 103, below the forecasted level of 105.5, and down from last month’s 108.7. It was back in June of 2021 at 128.9 and has been trending gradually lower since that time. And, while it is still well above the 85-90 range it crashed to during the onset of the pandemic, it appears the sugar high of the Covid-era recovery is fading. 

Building permit data came in as expected, and new home sales were in range of expectations at 675,000, though they were well off last month’s reading.  

Pending home sales data was released last Thursday, and indicated a decline of 7.1%, nearly nine times the small drop forecasted. Taken together, this data paints a picture of a housing market that is struggling thanks to high rates for new home buyers, and low rates that existing homeowners locked in before rates surged. Many buyers can’t afford what they once could, and sellers are reluctant to sell, because they can’t transfer their low mortgage rate to a new home purchase.  

Some Positive Economic Data

On the other hand, durable-goods orders strengthened, turning positive versus an expected decline, and initial jobless claims came in at 204,000, a solid figure that baffled some market watchers. Gross domestic product, or GDP, came in at 2.1% growth last Thursday, but that’s a second-quarter figure, which makes it old data as the third quarter closes.  

How should advisors and investors translate this mixed picture into researching potential exchange-traded funds for their portfolios? It starts with acknowledging that 2023 has turned from a year of recovery from 2022’s stock and bond market drubbing, to one of caution as we approach the time frame where the impact of those 11 rate hikes by the Federal Reserve is likely to be felt. 

Increasing market angst has prompted some advisors to sharply elevate allocations to ETFs that own shorter-term bonds, such as the $5.6 billion in assets SPDR Portfolio Short Term Treasury ETF (SPTS), which buys one- to three-year bonds, and doesn't stray from the perceived safety of U.S. government securities. 

Market-Neutral ETFs

Another outlet for weary allocators is to largely neutralize their portfolios from market swings, while maintaining equity market exposure. Within the alternatives ETF category, the Simplify Market Neutral Equity Long/Short ETF (EQLS) is a new, intriguing but somewhat complex fund, that uses a machine learning-powered ranking approach to identify 100 stocks each way (long and short) and combines them into one ETF.  

The objective of market-neutral ETFs is to allow returns to come entirely from stock selection, rather than stock market swings. EQLS has quickly reached $108 million in assets after making its debut on June 13 of this year. It had success in September, with a one-month trailing return through Wednesday of 3.3%. 

Not all ETFs are built for strong economies. Some are constructed with little regard for what the “stock market” does directionally. That makes this an ideal time for financial advisors to learn about them, to guide clients through highly uncertain periods.