From my vantage point, however, I do not anticipate economic acceleration. For all the chatter about exceptionally low jobless claims and the 5.4% unemployment rate, the reality on actual employment is far less compelling. According to a recent Harris poll of working-aged Americans, 40% of folks have given up looking altogether. They are not counted in the jobless claim or headline unemployment data. Simply stated, a massive outflow of working-aged people have been leaving the workforce. Moreover, when one compares the slope of the decline in the labor force participation rate (actual employment rate) after the 2001 recession with that of what has occurred since the 2008-2009 recession, it is easy to see that we’re not merely examining a happy trend of retirees exiting their jobs to play golf.
Couldn’t consumer spending pick up the economic slack? After all, the consumer supposedly explains 65%-70% of the gross domestic product (GDP) in the U.S. Don’t hold your breath. Overall spending since the end of the Great Recession has recovered at a sub-par inflation-adjusted rate of just 2.3%. The average over the last 68 years is 1/3 greater.
Dreadful wage growth and increased consumer saving simply do not bode well for any action by the Federal Reserve. And yet, if they do not get the Fed funds rate out of the zero percent commode, how would the Fed be able to stimulate the economy at a time of actual recession? Since the 1970s, the Fed has always lowered rates in the neighborhood of 500 basis points (5%). Even if the Fed manages to push its target to 0.5% by year-end, and 1% by mid-year 2016, is it not inevitable that we will turn back down to 0% and, if the stock market and economy are struggling enough, should we not expect QE 4?
In sum, investors are placing an inordinate amount of faith in central bankers, particularly the Federal Reserve. Having witnessed the errors in central bank judgment leading up to the dot-com collapse (2000-2002) and the real estate bust (2007-2009), I am less inclined to ignore the probability of a severe policy mistake. (In that matter, I believe the mistake was made when the Fed continued quantitative easing beyond the necessary confidence boost in the first emergency procedure circa December 2008).
I am more inclined to pay close attention to market fundamentals and market technicials. While the former suggest undesirable overvaluation here in the U.S., the latter suggest maintaining one’s allocation. Each of my key late-stage stock ETFs are holding firm to definitive uptrends, from iShares S&P 100 (OEF) to Vanguard Mid-Cap Value (VOE) to iShares Minimum Volatility (USMV) to SPDR Select Sector Health Care (XLV).
Where there has been room to put new cash to work for clients, however, I’ve been allocating to foreign assets – hedged and unhedged. The fundamentals are far more appealing at every turn, from price-to-sales ratios to dividend yields to P/Es. I remain committed to funds like Currency Hedged MSCI Germany (HEWG), iShares MSCI Germany (EWG), Currency Hedged MSCI EAFE (HEFA), Vanguard Europe Pacific (VEA) and Ishares Minumum Volatility Europe (EFAV). Each boast strong technical uptrends accompanied by a “golden cross” – a bullish indicator with a 50-day moving average crossing above a 200-day.
