A string of bad economic reports, including further declines in home prices and May's disappointing jobs report, have raised concerns that the U.S. economy is in the midst of a slowdown, which many economists are referring to as a "soft patch." The question now seems to be whether this will be a prolonged period of weakness, or just a bump in the road.
"The economy is still moving forward, but it's moving forward at a slow pace," says Russ Koesterich, chief global investment strategist at iShares. "And there are a number of headwinds that may linger for awhile."
The Dow Jones Industrial Average has declined for six consecutive weeks, the first time that's happened since 2002. And May marked the first month since December 2010 that stock mutual funds experienced net outflows, according to research firm Strategic Insight.
Such changing economic developments have implications for your investments. Here are six strategies for positioning your portfolio in today's slow-growth economy:
Conventional investing wisdom says to play defense when stocks tumble. Stocks of companies in sectors like consumer staples, healthcare, and utilities are generally considered "defensive." That's because these companies' revenues aren't tied to economic fluctuations, and the goods and services they sell are considered essential to consumers. Brian Gendreau, market strategist with Financial Network, a California-based financial advisory firm, says investors generally flock to defensive stocks during economic slowdowns rather than investing in cyclical stocks in sectors like technology and consumer discretionary. Typically, cyclical stocks don't perform as well during periods of slow growth because consumers cut back on non-essential items. A 2009 MSCI Barra survey found that from 1976 through 2009, during periods of contracting business cycles, defensive stocks in the MSCI USA Index returned an annualized 7 percent, while cyclical stocks lost an annualized 4 percent. The top three defensive sectors -- consumer staples, healthcare, and utilities -- returned an annualized 10 percent over the same period of time.
Be wary of treasury yields.
Treasuries have rallied recently. After the 10-year treasury reached a yield of nearly 3.8 percent earlier this year, it has steadily fallen to below 3 percent as of June 15. Experts say investors are seeking safety in treasuries because they're concerned about Greece's debt woes and the economic slowdown in the United States. Long-term investors may not want to bet on treasuries right now, experts say. Historically, treasuries have traded about 2 to 3 percent above the inflation rate, Koesterich says. But today, the 10-year treasury yield is trading below the inflation rate. "While I don't think inflation is a risk in 2011 and probably not even 2012, you do want to worry about purchasing power over the long term," he says.
Instead of locking in a low yield with treasuries, Koesterich says investors should consider "mega-cap" stocks, the largest U.S. stocks, which are included in the S&P 100. "They're very levered to international growth," he says, meaning they allow investors to take advantage of growth in other countries that are not experiencing as much of a slowdown as the United States. "Most of these companies will have some ability to raise prices if inflation starts to rise, so it's more likely to protect your purchasing power than buying a treasury with a 3 percent coupon," he says. Even bond guru Bill Gross, who manages the world's largest bond fund, PIMCO Total Return (PTTAX), has urged investors to consider buying dividend-paying stocks like Coca-Cola, Proctor & Gamble, and Johnson & Johnson .
Buy the unloved.
At times, different sectors of the stock market are shunned by investors because they're perceived to be out of favor. That can present investing opportunities, says Rob Stein, senior managing director of Chicago-based Astor Asset Management. He's currently bullish on the financial services sector, which he says has been unfairly beaten down over concerns about regulation. "Jump into the fire," he advises investors. Stein invests in exchange-traded funds like Financial Select Sector SPDR (symbol XLF), which provides exposure to big banks like JPMorgan Chase and Goldman Sachs, as well as insurance companies like Prudential and Aflac. Year-to-date, the ETF is down almost 4 percent. The S&P 500, by comparison, has returned about 1 percent.
Another way to protect your money is to invest in hard assets like real estate investment trusts (REITs) and commodities such as gold. Inflation is on the rise in the United States, and experts say real assets can help protect your portfolio's purchasing power. "Our portfolio has a very atypically large allocation to real assets -- being real estate and commodities -- than most portfolios do," says Mebane Faber, manager of Cambria Global Tactical ETF (GTAA). "And the reason why is because inflation is an investor's greatest enemy." Faber primarily invests in other ETFs, including Vanguard REIT Index (VNQ), SPDR Dow Jones International Real Estate (RWX), and PowerShares DB Precious Metals (DBP). So far this year, the Vanguard REIT Index has returned about 8 percent.
Bond yields are near historic lows in the United States, but there are higher-yielding bonds in other parts of the world. Marilyn Cohen, author of Surviving the Bond Bear Market, suggests investors look abroad to countries with better fiscal positions than the United States. Currently, Cohen is shunning treasuries and government agency bonds. In their place, she recommends Canadian and Australian bonds. "The balance sheets of those countries look good," she says. "They look great compared to ours." Investors in foreign bonds also stand to gain if the dollar continues to depreciate against their currencies, Cohen says.
For more investing insight and money advice, visit iHaveNet's Wealth section
Available at Amazon.com: The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era
- 6 Investing Ideas for Today's Slow-Growth Economy
- The Most Successful Companies Stay Relevant
- When Asset Size Matters in Fund Investing
- Investing Intelligently Yet Cautiously Key for Rest of 2011
- 50 Best Funds for the Everyday Investor
- 2 Bright Spots in Europe: Denmark and Norway
- 5 Ominous Signs for Stock Investors
- Executive Pay Zooming Skyward Again
- Bank Stocks Slow to Show Recovery But Could Be Turning the Corner
- United Technologies: Conglomerate Relies on Cyclical Growth Factors
- International Paper Company Thinks Inside the Box
- Why Copper Is the Metal to Watch
- Auto Industry Weathers High Fuel Prices
- 6 Numbers Every Investor Should Follow
- ETFs Not Just For Riverboat Gamblers
- What Investors Can Learn From the VIX
- How to Find Value Stocks
- Learning From Madoff
- PIMCO's Bill Gross Wades Into Active ETFs
- The Smaller the Better: Investing in Micro-caps
- Confidence Remains Strong in Global Markets Despite Crises
- What Standard & Poor's U.S. Outlook Downgrade Means
- The Appeal of Go-Anywhere Funds
- Demand and Disasters Complicate Global Energy Picture
- Russia Stocks Soar on Rising Oil Prices
- Energy and Construction Stocks Looking Good -- For Now
- What Investors Can Learn From Fund Flows
- High-priced Stocks Worth the Money?
- Investors Continue to Chase Short-Term Performance
- 5 Reasons Investors Should Not Bail on Japan
- What Happens After Quantative Easing 2 Ends?
- A Closer Look at Restaurant Stocks
- Adobe Overcomes Obstacles to Continue Its Rise
- Where to Find the Dividends Now
- What Style of Index Investing Is Right for You?
- The Case for (and Against) European Stocks
- Tech Stocks Volatile But Undeniably Strong
- Find This Year's Investing Strategy in Last Year's Return
- Why Big U.S. Stocks Look Like a Good Bet
- Diversification: Can You Have Too Much of a Good Thing?
- 5 Tax Tips for Mutual Fund Investors
- What's the Best Way to Buy Bonds?
- Realities of New Retirement Changing Investment Strategies
- How Contango Affects Your Investments
- Best Intermediate-Term Bond Funds for the Long Term
- Elephant-Sized Mutual Funds Slow to Adapt But Steady
- What Next for Gold? Is Gold's Latest Selloff a Turning Point?
- eBay: Competition and Changing Trends Cloud Online Marketplace's Future
- What the Egyptian Uprising Means for Investors
- 'Latin American Decade' or Wishful Thinking?
- Emerging Markets: Proceed With Caution
- Best Large-Cap Blend Funds for the Long Term
- What Will QE2's Legacy Be?
- Hybrids, Electrics and Overseas Growth Pushing Ford Motor
- Muni Bond Market Safer Than You Think
- Is Now the Time to Buy Municipal Bonds?
- SEC Takes Steps Toward Financial Planning Overhaul, But Issues Remain
- How to Invest for Income
- Forget the BRICs: How to Invest in Emerging Markets
- Can REITs Continue to Rally in 2011?
- How to Invest in Rising Oil Prices
- Research Vital to Finding Right Target-Date Retirement Fund
- Consumer Staples Positioned Well for the Recovery
- Municipal Bonds: Trouble Brewing or Media Hype?
- Best Mid-Cap Blend Mutual Funds for the Long Term
- The Case for Active ETFs
- Cash Rich Companies to Watch in 2011
- Google's Growth Could Slow But Still a Solid Buy
- Growth Expected to Continue in Emerging Markets in 2011
- How to Navigate the Bond Market in 2011
- Five Ways to Introduce Youngsters to Stock Investing
- The Outlook for Value Investing
- Best Small-Cap Blend Funds for the Long Term
- 8 Investing Resolutions for 2011
- Growth Versus Value Investing in 2011
- Big Tobacco Leader Altria Holding Steady Despite Worries
- ETFs Capture Market Attention & Investment
- 5 Investment Themes for 2011
- How to Take Advantage of a Weak Dollar
- Best Foreign Large-Cap Blend Funds for the Long Term
- Fed Moves Boost Stock Returns
- Bond Funds Really Can Lose Money
- Teach Your Kid a Lesson in Investing
Investing - 6 Investing Ideas for Today's Slow-Growth Economy | Successful Investing
(c) 2011 TRIBUNE MEDIA SERVICES, INC.