Technical analysts have to note that quite a few areas of the market are “rolling over.” Fundamentally, the Dow has seen three consecutive quarters of earnings declines, while the trailing 12-month P/E for the Russell 2000 is 100. That’s right… 100! And one-half the companies that have reported their earnings missed analyst sales projections. Does this sound like a near-term recipe for a dramatic leg up in the U.S. bull market? If the Federal Reserve intended to initiate additional stimulus, perhaps investors could take the action as a reason to bid stock prices higher. Alas, the continuation of tapering has created uncertainty about whether or not rates will remain low enough to support higher stock valuations.
It is true that stocks may still be attractive in a yield-deprived world. Nevertheless, even in an environment with historically low interest rates, home sales have been declining since August of 2013 and home prices have been declining since September of 2013. The influential real estate segment may not be able to contribute all that much to the gross domestic output of the U.S.
Indeed, there are scores of conflicting data points that have kept the U.S. market range-bound. Mix in unfavorable seasonality patterns (May-October) as well as the potential for the November elections to place Congress in the hands of a single party, and climbing the proverbial wall of worry seems even more arduous.
My suggestion is to tread where the trends are favorable and the value is more identifiable. For example, European equities with attractive valuations still exist in the large-cap space. Consider iShares MSCI EAFE Value (EFV). Maintain allegiance to the homefront, yet do so through less price volatility in iShares USA Minimum Volatility (USMV). Don’t be afraid to consider extremely out of favor investments with remarkably attractive fundamental characteristics. Both Market Vectors Russia Small Cap (RSXJ) and Market Vectors Brazil Small Cap (BRF) might fit the bill. Lastly, when the entire economic community tells you that rates are going higher or that yields are too low to consider bonds, let the price movement determine your allocation. Few ETF investments have been as profitable as Vanguard Extended Duration Treasury Bond (EDV) in 2014.