I certainly cannot say that the next bear market in stocks is here. Heck, we have not even seen an actual correction of 10% since 2011. However, I will take note of several realities that threaten the well-being of U.S. equities. First, ever since the Federal Reserve officially ended its third round of quantitative easing in October, economic indicators have weakened considerably. This has not helped the Fed in its quest to raise overnight lending rates. Not surprisingly, the Fed itself has already downgraded its expectations for the economy in 2015, 2016 and 2017. What’s more, central bank committee members also expressed that the pace of any rate hikes would likely come at a significantly slower pace.
Second, analyst estimates of corporate profit and revenue have been falling faster than the credibility of Brian Williams. (Okay, that was a cheap shot.) Nevertheless, even if the game of beating low-ball estimates continues, 0% earnings per share growth over -3% expectations is downright pathetic. Historically speaking, when sales and profit trends weaken, the stock market wobbles.
I have been sticking with the same lower volatility ETFs that have been working well for clients over the past 18 months. For domestic stock exposure, we still hold iShares USA Minimum Volatility (USMV), SPDR Select Sector Health Care (XLV) and Vanguard Mid Cap Value (VOE). For domestic bond exposure, we still hold Vanguard Long Term Bond (BLV) and iShares 10-20 Year Treasury (TLH). And, as always, we protect against severe sell-offs with hedges and stop-limit loss orders.