Mixed Economic Data Finds Advisors Feeling Stuck in the Middle

ETFs provide a wide range of methods for financial advisors and investors to construct effective, risk-managed portfolios for clients. But given the flurry of economic data published on Thursday morning, they could be forgiven for feeling stuck. 

The personal consumption expenditures index, or PCE, came in at annual rate of 3.3% Thursday, but the core version hit Wall Street’s expected 4.2% level. That’s encouraging progress from March’s 5.4% peak level.  

But the Fed may not be euphoric about that figure, and unlikely to declare the inflation fight settled any time soon. That’s because the 4.2% annual rate for core PCE is still the highest recorded figure since 1990. And for most of this century, 2% has been the typical level. 

Advisors and self-directed investors are trying to determine where we are in the business cycle. Perhaps the theme song amid so much conflicting data and Fed guessing games is “The Middle,” by Zedd, Maren Morris, Grey. 

ETFs and the Economic Data 

Advisors and self-directed investors are trying to determine where we are in the business cycle. If a recession is approaching—based on recent data such as that indicating a tightening labor market and the daunting prospect of 40 million people pressed back into paying down their student loans after a long break—that has implications for stock and bond markets.  

Those implications are quite different from what might work best for clients if the Fed successfully pulls off a “soft landing,” with the economy bending but never truly breaking, as it typically does in business cycles. This is why there has been so much focus on things like the 10-year U.S. Treasury yield, and why the stock market is more obsessed than usual with that and the Fed’s every thought and word. 

Other Thursday economic data included the ADP weekly job report, which showed a noticeable drop in new jobs, and the biggest rise in consumer spending in six months. However, that latter figure increasingly looks like old news already, based on a collection of recent data to the contrary, including weak outlooks from retail companies. 

Fed’s Mission Not Complete 

Put it all together and what do you have? The middle; as in, advisors stuck in the middle, trying to make long-term asset allocation and planning decisions for clients, at a time when the crosscurrents are akin to the financial version of Hurricane Idalia. That hurricane will pass, but perhaps the tilt toward a more troubling economy is just beginning to show its hand. 

In such an environment, advisors can turn to ETFs in a variety of categories, to establish or replace the type of “core” portfolio position that used to work when interest rates were much lower—that is, last year. 

By using etf.com’s Screener tool, advisors and investors can intelligently hunt through alternative categories for core portfolio holdings in an era where stock and bond levels do not resemble what they were just a short time ago.  

Some ETF segments that might be considered: short-term bonds, (U.S. Treasury, corporate, municipal and others); value equity ETFs, which have drastically underperformed growth stocks; dividend equity ETFs, which have recently seen some price lift; and even some alternative categories, such as long/short and covered call ETFs, which invest “long” in stocks, but alongside some form of risk-reduction cushion. 

This is no time to be stuck in the middle, even if the Fed appears to be. Its mission is not complete (according to Powell), but the economy is starting to change in ways that are more Fed-friendly than we’ve seen much of this year. As usual, a September to remember seems likely.