Along with the slow income growth and high debt levels, consumers will now face the expiring payroll tax holiday, upper-income households will see higher taxes and the late deal will translate to delayed tax filings and tax refunds.
“We suggest investors remain cautious on US small caps and consumer stocks, which typically fare relatively poorly in slow-growth environments,” Koesterich said.
- iShares Russell 2000 Index Fund (NYSEArca: IWM)
- Vanguard Small-Cap ETF (NYSEArca: VB)
- Consumer Discretionary Select Sector SPDR Fund (NYSEArca: XLY)
- SPDR S&P Retail ETF (NYSEArca: XRT)
On the other hand, Koesterich suggests looking at U.S. large- and mega-cap companies that have a large global footprint and less sensitivity to domestic growth.
“US Companies are highly profitable and reasonably priced, but they are somewhat expensive relative to other markets currently,” the analyst said. “Instead, we believe investors should consider overweighting emerging markets, smaller developed countries and peripheral European exporters.”
- Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO)
- iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM)
- iShares MSCI Israel Capped Index Fund (NYSEArca: EIS)
- iShares MSCI Switzerland Index Fund (NYSEArca: EWL)
Lastly, the iShares analyst also thinks that dividend stocks still look attractive. The new fiscal debt deal will mean higher rates for some taxpayers, but it “should not have a significant effect on dividends,” Koesterich said. Moreover, Koesterich points out that companies have room to raise dividends to compensate for the tax changes. [Dividend Stocks, ETFs Could See Higher Payouts]
- Vanguard Dividend Appreciation ETF (NYSEArca: VIG)
- iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY)
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Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own DVY, IWM and EEM.