After the worst month of a new year since 2009 and an earnings recession, economic growth could support the equities market and stock exchange traded funds ahead.
Year-to-date, the SPDR S&P 500 ETF (NYSEArca: SPY), iShares Core S&P 500 ETF (NYSEArca: IVV) and Vanguard 500 Index (NYSEArca: VOO) have lost about 5.0%.
Dragging on U.S. stocks, fourth quarter earnings results have been lackluster.
“We’re seeing an earnings recession. And 75 percent of the time earnings recessions have preceded or accompanied economic recessions,” S&P Capital IQ’s Sam Stovall told CNBC.
In January, analysts lowered earnings estimates for S&P 500 companies for the quarter, John Butters, senior earnings analyst at FactSet, said in a note. The Q1 bottom-up earnings per share estimate, an aggregation of estimates or all companies in the index, dipped by 4.7%. To put this in perspective, the average decline in the bottom-up EPS estimate over the first month of a quarter has been 3.3% for the past four quarters. During the past five years, the average dip in the bottom-up EPS estimate during the first month of a quarter has been 1.9%.
However, Stovall is holding on to that 25% possibility that the economy can maintain growth ahead.
“What makes me feel that we could turn … lemons into whiskey sours is when you look to economic growth,” Stovall said, predicting 2.7% growth for 2016, a 4.6% unemployment, wage growth of over 3% by the end of the year and inflation around the Federal Reserve’s 2% target.
“We think that’s actually going to improve the investor ability to start spending some of that money,” Stovall added. “Even if we have all four of the [Fed interest] rate increases in each of the coming four quarters, that’s going to put the fed funds rate at 1.25 percent. With inflation at 2.1 percent, we’re still at a net negative of real rate environment.”
Nevertheless, ETF traders who are still concerned about the prospects of a market pullback over the short-term may include inverse strategies to help hedge their long equities exposure.
For those who are wary of a potential pullback in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500. The ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500. Year-to-date, SH gained 5.0%, SDS rose 9.5%, SPXS increased 13.7% and SPXU advanced 13.7%.
Max Chen contributed to this article.