Three investment strategies for QE3
(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)
By John Wasik
CHICAGO (Reuters) - If there's another round of stimulus from the Federal Reserve, as has been telegraphed by Ben Bernanke, it may end up sounding like an alarm clock that barely rings. It will be heard, but it may not be enough to rouse a drowsy U.S. economy.
The Fed's previous bond-buying sprees - which pumped more than $2 trillion into the U.S. economy and kept interest rates near zero - put a fire under stocks as investors moved from poor-yielding bonds.
But will more bond buying morph into a fall rally? It depends on whether the economy responds. That would mean improvement in job growth, housing prices and general economic activity.
For those cheerleading the American recovery, though, it was disheartening when the Institute for Supply Management reported that U.S. manufacturing retreated in August at its sharpest rate in more than three years. That was despite automakers having their best August since before the 2008 meltdown.
Market analysts are also watching with concern as economic growth slows in China.
There is a crisis mentality keeping interest rates low and anxiety high, even as the European debt picture brightens somewhat. With the combined malaise of the euro zone and paltry U.S. economic and job growth, any quantitative easing by the Fed will seem like a desperate move to re-invigorate the American economy.
As Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock told me: "Near-term alleviation of euro zone breakup fears through European Central Bank policy intervention may help stem the fear premium embedded in interest rates. With interest rates at historic lows and many European short-end government bond markets at zero or even negative nominal yields, odds are skewed toward modestly higher interest rates."
The current skittish economic picture reminds me of the perennial Peanuts cartoon in which Charlie Brown's erstwhile friend Lucy gets Charlie excited about kicking a football, offers to hold it and then pulls the ball away at the last moment. There are many pundits who want to get jazzed about a U.S. economic rebound, but then some development in Europe or Washington thwarts that enthusiasm. Good grief.
How do you invest in this Charlie Brown economy? Here are three strategies that will move you away from the headlines and better position you long term:
1. Make a crisis hedge.
I'm still not convinced that anyone should hold most of their portfolio in commodities because they don't pay dividends and typically don't represent earnings derived from corporate profits. Yet a case can be made for their haven-like qualities from dollar-based fears. The largest gold-owning exchange traded fund, the SPDR Gold Trust, is still a good vehicle for the yellow metal.
If you want more metals, the iShares Silver Trust is a consideration. For overall commodities indexing - covering everything from agricultural goods to metals - consider the PowerShares DB Commodity Index Tracking Fund. The ETF tracks crude oil, gasoline, copper, soybeans and several other commodities. Just keep in mind that commodities in general are highly volatile; they should represent no more than 10 percent of your portfolio. Also, bear in mind that if a global slowdown continues, they will certainly lose value.
2. Target U.S. stock sectors.
Let's say that the Fed stimulus - or other animal spirits - actually succeeds in jump-starting the economy. American consumers then return to retail stores and restaurants and start traveling again. That's a big boost to consumer discretionary and durable goods. ETFs such as the Consumer Discretionary SPDR and Vanguard Consumer Discretionary funds hold companies that will benefit. Long-term, it still makes sense to bet on a rebound and stocks are the place to be when the turnaround takes hold.
3. Take a broad-based approach.
This is always my preferred mode rather than making specialized bets on sectors. The iShares Dow Jones Total U.S. Market Index fund, holds 95 percent of the American stock market. Funds like this should be a core holding because they cover so much of the market at so little cost.
At the very least, uncertainty risk should remain high in coming months as the markets juggle news from the United States, China and Europe. Those who are hedging against further devaluation of the dollar or euro should be prepared if the trend reverses. The bottom line is to know what your portfolio gut factor is: How much can you not afford to lose if the Fed fails?
(Follow us @ReutersMoney or here)
(Editing by Beth Pinsker Gladstone and Dan Grebler)
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