How to Assess your Economic Picture
by Vern Sumnicht, ETF Research, iSectors
Mark Twain was famously known for the quote, ârumors of my demise are greatly exaggerated,â which is largely applicable to the U.S. economy today. It seems that everyone I speak with is very concerned about some form of economic collapse. Perhaps the market âcrashâ of 2008 remains embedded in investorsâ psyche.
However, the current environment looks much different than that of six years ago. As I mentioned last quarter, consumer spending makes up 70 percent of Gross Domestic Product (GDP), or the calculation of economic growth. You may recall my discussion of how the low oil price is putting money in the pockets of consumers; estimates are that low oil prices are saving consumers $700 per family, per month or $8,400 per family, per year. While low gas prices help, of course, nothing provides consumers with more spending money and therefore, more economic growth, than jobs.
Ideally, economists would like to see 200,000 new jobs per month to confirm a period of economic growth. The economy has averaged 203,000 jobs per month since October 2010. In addition, hours worked are up from 33.7 to 34.4 hours per week, unemployment claims are down, and workers are earning 2.2 percent more this year than they did one year earlier. Combine all of this with central banks around the world working to keep interest rates low and making capital available for businesses, and it would be very unusual to see an economic collapse in the U.S. economy in this environment.
Nonetheless, this is a difficult environment for individuals living on a fixed income. The problem is trying to invest money safely and get a reasonable return on your investment. Money market funds and CDs arenât even keeping up with inflation. Longer term bonds yield more but, longer term bonds are dangerous to own when the Federal Reserve has indicated they are going to raise interest rates at least once this year. My best suggestions for fixed income investors would be:
1. Short-term bonds. A diversified portfolio of short-term bonds, or for investors in a high tax bracket, short-term municipal bonds. Short term bonds yield more than money markets or CDs and in addition, they will typically lose very little principal relative to longer-term bonds should interest rates go up.
2. Fixed annuities. Fixed annuities currently return 2.5-3.5 percent and the income is tax deferred but, more importantly, fixed annuities donât lose principal should interest rates go up.
3. Dividend-paying, large U.S. corporations. High quality, large multi-national U.S. corporations that have provided consistent increases in dividends for 10-20 consecutive years. For example, look at the S&P Aristocrats Index. These stocks are very large and they dominate their markets. These companies are not going bankrupt; they will be around a long time and a diversified portfolio paying out 2-3 percent in dividends annually will go a long way in supplementing the lower income received on fixed income investments. Not to mention, you will get long-term growth and you can wait a long time for market corrections to recover when your stock portfolio is consistently providing dividends of 2-3 percent annually. You might consider looking at these exchange-traded funds (ETFs): SPDR S&P Dividend (SDY), First Trust Value Line Dividend Index Fund (FVD), or PowerShares High Yield Equity Dividend Achievers Portfolio (PEY).
This economic environment may be difficult for fixed income investors to find safe income. Â However, remember that we also have very low inflation right now. Â Therefore, itâs not necessary to get 5-6 percent interest on your investments when inflation is less than 1 percent. Â And, as I implied, paraphrasing Mr. Twain, âthe rumors of the economyâs demise are greatly exaggerated.â
Disclosure: Some of the iSectorsÂŽ, LLC index-based asset allocation models hold SDY and FVD. They do not currently hold PEY.
Originally contributed to USA TODAY NETWORK Wisconsin
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