Bond and Stock Markets Jolted by Latest Economic Data

ETFs offer a place to hide when markets turn ugly.

Reviewed by: Mark Nacinovich
Edited by: Sean Allocca

Apparently, September was not the main dish for market bears ... just the appetizer.

With current market action in bonds and stocks bringing up memories of some scary Octobers in investment history, namely 1987 and 2008, it seems any new developments are treated with a most skeptical eye.

This is a time when financial advisors and investors have a choice: be bold and confront the bear market head-on or hide from it until the bear leaves town. Either way, ETFs have been allowing people to turn ideas into action.

The latest data on job openings, known as the JOLTS report, showed more than 9.6 million available spots, versus 8.8 million expected. The trend in JOLTS has been down during most of 2023, but the latest data was at least a bounce higher.

That type of news prompts increased concern that the Federal Reserve will not soon lower interest rates since the economy is not sufficiently cooling. With the Fed meeting four weeks from now, this also heightens the potential for another rate hike.

Stocks or Bonds? Pick Your Poison

Steep drops in stocks and long-term bonds in the last five weeks are strong evidence that the market climate is changing. Gone are the years of zero interest rates, replaced by inflation and increasing concerns around the globe about the lack of fiscal policy that can reverse a high and accelerating debt burden for the United States. That has helped take the S&P 500 from over 4,500 to around 4,200 since early September, while the 10-year US Treasury bond yield has leaped from 4.15% to 4.80% during that period.

For the current generation of investors (anyone who was not an active market participant in the early 1980s), this is a brand-new world. Bonds don’t simply offset losses in stocks as they used to. Cash-like instruments, such as the SPDR Lehman 1-3 Month T-Bill ETF (BIL) have been and will continue to be one place of refuge for investors who are more concerned with return of capital than return on capital. 

That said, while the SPDR® S&P 500 ETF Trust (SPY) has an average annualized return of 11.5% over the past 15 years through Monday’s close, BIL’s 5% no-frills return likely represents a nice hiding spot while the current turmoil ultimately turns one way or the other.

ETFs for Financial Advisors and Investors

ETFs traded on U.S. exchanges now number more than 3,000. And they are far from a collection of similar securities or similar objectives. For instance, covered call ETFs like the First Trust Buy Write Income ETF (FTHI) are a two-part investment. FTHI, a $263 million fund that is up 12.5% this year and yields around 9%, starts with a base portfolio that tracks the S&P 500 Index. 

But as with other so-called covered call ETFs, FTHI’s managers sell call options on that portfolio, and do so at different option strike prices, expiring at different points over the next three months. That does not stamp out loss when the stock market declines, but it does provide an income cushion for longer-term investors.

There are ETFs to enhance yield or sit on the sidelines. And there are ETFs that allow investors and financial advisors to tactically pursue bullish or bearish outlooks on the stock and bond markets. From BIL to SPY, in between and beyond, the current market storm is an ideal motivator for greater discovery and usage of ETFs, as what worked in the past gradually transitions to a different type of investing environment.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.