(By Tom) Markets have seen a strong rally in recent weeks mainly off of the belief that European officials are committed to saving the euro, something the market was not sure of until recently. Furthermore, there are prospects for more quantitative easing from the ECB, the Fed, and other central banks.
So if you look at just the S&P 500 and ignore the news out there, you could make the case that we're in the midst of a bull market. But contrarian investors must look beyond what markets are doing and take in the full economic picture.
Simply put, the global economy is in bad shape. Europe is already in recession, China is slowing, and just this week the Japanese GDP disappointed. And while optimism seems to be growing here in the U.S., you need to keep in mind that in the 2nd quarter of this year our economy grew at an anemic 1.5 percent … barely positive.
These certainly aren't the type of numbers that would normally result in the S&P 500 moving up more than 11 percent year-to-date.
So why is the market continuing to rise when the global and domestic economy is so weak?
The answer is simple: The market believes that all the central bank stimulus will get the global economy out of its current funk, and better days of higher growth are ahead.
That's a big assumption for investors to make …
A lot of the stock market weakness earlier this year was because of the prospects for a total collapse of the euro zone due to a Greek default and the country leaving the euro. As stated earlier, it appears that may be taken off the table. But the global economy is still in trouble, and economies don't simply turn on a dime.
So just because Europe might not break up, it doesn't mean the global economy is all of a sudden going to turn around. Consumer demand remains weak, many countries (including the U.S.) have huge debt loads to address. And the emerging markets are no longer the engine of growth that they have been over the last decade.
Investors Fear Coming Volatility
In thinking about how to invest in this type of environment, it's important to remember that sometimes, past is prologue. A slow growth economy, absent a potential for a European implosion, is what we've been dealing with on and off for the past few years. In that type of environment, with high unemployment and stagnant wage growth, consumer staples stocks have tended to outperform.
And here's why:
The economy isn't in free fall, but there remains a lack of clarity. So individuals are more budget conscious and less likely to extend themselves. They want to make their dollar go further. Therefore, we've seen stocks like Dollar General (DG), McDonald's (MCD), Proctor & Gamble (PG) and other consumer staples stocks outperform last year and over the previous years.
An easy way you might consider investing in the consumer staples sector is through the Consumer Staples Select Sector SPDR (XLP). This exchange traded fund has a strong mix of some of the largest consumer staples stocks in the market. Plus it pays a nice 2.5 percent dividend yield … a huge plus in a zero-interest-rate environment.
It's important to remember that just because the stock market is rising in the short term, it doesn't mean the skies have cleared and it's a sign to take on a lot of investment risk. The global and domestic economies are still weak, and there remains a lot of risk to a recovery not just globally, but here in the U.S.
Keep that in mind when making investment selections, and resist the urge to jump on board, just because stocks are rising.
Best,
Tom
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