Mainstream pundits have been telling stock investors throughout 2019 that it does not matter if long maturity Treasury bonds yield less than short maturity Treasury bonds. They have been explaining that you should ignore the fact that, for the most part, the 10-year yield has been offering less than the 3-month yield since mid-May.

However, financial institutions often rely on borrowing money at lower short-term rates and lending at higher longer-term ones. When the spread between short and long flattens, they struggle to find avenues of profitability. When the relationship between short and long flips on its head, public financial companies look to minimize risks altogether.

That’s where we are today with the inevitable inversion of the closely monitored 2s and 10s.

There are those who will try to tell you that “spread lending” isn’t the only aspect of financial services. Yet those who have shared the faith in a diverse financial service sector have not been rewarded for that faith in 19 months.

Specifically, consider the Financial Select Sector SPDR Fund (XLF). It has experienced a bearish backdrop since January of 2018.

The bearish backdrop over the last 19 months is hardly confined to the influential financial segment. A similar pattern has been seen in energy stocks as well as Materials Select Sector SPDR Fund (XLB).

A number of comment providers will say, “So what? The overall U.S. economy is strong and the S&P 500 is still near all-time highs.”

My reply? The rest of the world’s top economies have never quite recovered from the 2008 financial collapse. In fact, governments are still providing extraordinary amounts of stimulus (a.k.a. “easy money”).

Is it working? Not if stock markets represent confidence. Nearly 12 years since the inception of the global financial system’s breakdown, U.S. investors have only seen gains in U.S. stocks.

12 years of losses for U.S. investors in international equities? Indeed, the Vanguard FTSE All-World ex-US Index Fund has only lost money since October of 2007. The real stock bull — the only definitive stock bull — is the one that U.S. investors have experiences stateside.

Another way to look at it? The “new” international stock bear began 19 months ago in January of 2018.

It is worth noting that the 10 leading economies are: (1) United States, (2) China, (3) Japan, (4) Germany, (5) United Kingdom, (6) France, (7) India, (8) Italy, (9) Brazil, (10) Canada. Excluding the U.S., every one of the top economies is noticeably frail.

Recently, China’s economy has struggled with the ongoing trade war. Yet the country’s real estate bubble and debt accumulation has been worrisome for quite some time. Whereas U.S. stocks have nearly doubled since the start of the 2008 financial crisis, Chinese stocks on the Shanghai Composite have been CUT IN HALF.

The world’s third largest economy, Japan, suffers from an aging population and a shrinking workforce. Meanwhile, the Bank of Japan has never been able to leave zero percent interest rate policy. U.S. stock investors have not benefited from an allocation to iShares MSCI Japan ETF (EWJ) since the Great Recession began.

The world’s fourth largest economy, Germany, relies heavily on its exports. Weak economies across Europe have adversely impacted Germany for years. More recently, tariff disagreements as well as Brexit uncertainty in the United Kingdom have been devastating. U.S. investors who may have believed in iShares MSCI Germany (EWG) for more than a decade have been sorely disappointed.

The United Kingdom is a “hot mess.” In the 2^nd quarter, its economy shrank (0.2%). Meanwhile, Britain’s protracted withdrawal from the European Union has wreaked havoc. U.S. investors who stayed away from iShares MSCI United Kingdom (EWU) have been fortunate.

Things have been bleak for the others on the top economy list as well. Unemployment is near a 45-year high in India. French unemployment has remained stubbornly high since 2008’s global financial catastrophe. Italy, has been in and out of recession since 2008. Materials-rich Brazil faces pressures from a worldwide slowdown in demand.  And U.S. investors have not profited by investing in an oil-n-gas-heavy mix of Canadian corporations.

What does one learn from assessing the world’s various predicaments? That the U.S. has been the exception, not the rule.

Granted, the U.S. economy may have the potential to lift other economies out of the doldrums. Resolution on the trade war front could go a long way toward improving economic prospects globally. What’s more, the Fed may decide to aggressively cut its overnight lending rate to “un-invert” the yield curve.

On the flip side, both Europe and Asia were battling difficulties long before Americans began googling the word “tariffs.” It is quite possible that the world’s troubles will spread to our shores, causing U.S. stocks and other asset prices to drop dramatically.

In the meantime, my near-retiree and retiree client base has experienced far less portfolio volatility and drawdown. We have done well with assets such as iShares Core Treasury Bond (GOVT), iShares AAA-A rated Corporate Bond (QLTA), VanEck Vectors Preferred Securities ex Financials (PFXF), iShares Core U.S. REIT (USRT), iShares MSCI USA Minimum Volatility (USMV), Vanguard Dividend Appreciation (VIG) and Vanguard MegaCap (MGC).

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

An authoritative figure pulls a chicken egg from a carton. He holds the egg up for the television viewer to see.

“This is your brain,” he announces. Then he points to a frying pan and says, “This is drugs.”

The man cracks open the egg on the side of the pan. He then spills the viscous contents into the skillet and allows the slop to sizzle. “This is your brain on drugs.”

He waits for a second or two to let the imagery sink in. Then he stares into the camera knowingly and remarks, “Any questions.”

Young people in the 1980s, myself included, lampooned the iconic public service announcement. And why not? Most of us enthusiastically experimented with marijuana and alcohol. Others used pills, cocaine and heroin.

It wasn’t that we had dismissed the notion that drugs damage brain functioning. We were living for the moment rather than thinking about our futures. What’s more, we made a collective stink over the difference between use and abuse.

Are today’s investors able to make the distinction between the use of economic stimulus and its perversion? I doubt it.

Monetary policy stimulus (e.g., rate cuts, quantitative easing, etc.) as well as fiscal stimulus (e.g., infrastructure spending, tax cuts, etc.) helped the U.S. get out from underneath 2008’s Great Recession. Yet easy access to ultra-low borrowing costs for an extended period in the 2000s fostered the housing bubble. The same misapplication of monetary policy in the 1990s nurtured the technology balloon.

Eric Hickman at Adviser Perspectives recently demonstrated stimulus use, overuse and eventual recession going back to the late 1980s. The Fed makes an effort to ween the economy off of lower-than-normal rate policy by raising its overnight lending rate. The activity causes shorter maturity Treasury bond yields like the 2-year to rise faster than longer-term yields like the 30-year. The yield curve flattens. It eventually inverts, prompting the Fed to start cutting rates. A recession begins shortly after the easing begins in earnest.

Are we stuck in a similar quagmire today? I believe that we are. Throughout the 2010s, policymakers chose to manipulate rates so low for so long, the investment community became hopelessly addicted. It’s likely to cost us dearly.

Some believe that the Federal Reserve can prevent a recession by sending us back toward zero percent rate policy. However, in addition to printing electronic money credits (a.k.a. “quantitative easing”), central banks around the world have been slashing rates to zero or below for years. The activity has not kept Europe or Asia from recessionary pressure.

Meanwhile, investors may be losing faith in central banking outside of the United States. An international stock bear is closing in on 19 months.

Troubles abroad — Brexit, recession, trade war, negative interest rate debt — might not adversely impact domestic stocks. However, the evidence seems to be pointing to the contrary.

The Financial Select Sector SPDR (XLF) peaked in January of 2018 and remains roughly 10% below a January 2018 “high.” Moreover, its price movement is very similar to Vanguard’s FTSE All-World ex-US Index Fund (VFWIX).

What about influential oracles like Warren Buffett? Though Buffett’s Berkshire Hathaway (BRKB) hit new highs in October of 2018, the pattern is eerily similar.

Granted, Buffett’s Berkshire Hathaway (BRKB) is highly correlated with the financial sector. Nevertheless, the explanation does not account for underperforming stocks in the Russell 2000. The iShares Russell 2000 ETF (IWM) has failed to make progress since January of 2018.

There are those who would rather highlight the resiliency of the Dow Industrials, S&P 500 and Nasdaq. They’re ignoring historical precedent. They’re also ignoring the extent of stimulus addiction.

In late December, the Fed turned 180 degrees from tightening to neutrality. By May, the Fed began signaling an intent to manipulate borrowing costs lower, and that wasn’t enough. Here in August, investors, the media and the White House are all clamoring for more.

More rate cuts. More QE. More tax breaks. More, more, more, more, more!

The Fed will eventually acquiesce to the rebel yell to support stocks. That’s all that central bankers know how to do.

On the other hand, more of the same low-rate support has not been as big of a boon to small company stocks, mid-sized company stocks, energy stocks, materials stocks, industrial stocks or financial stocks. More of the same intoxicant seem to be floating fewer and fewer boats.

Large-cap S&P 500 stock investors ought to take note of the shift toward less risky assets over the last six months. ETFs that I have favored in that time include the Consumer Staples SPDR (XLP), iShares MSCI Minimum Volatility (USMV), iShares US Core REIT (USRT), Van Eck Preferred ex Financials (PFXF) as well as iShares Core U.S. Treasury (GOVT).

The U.S. economy may continue to defy the odds. Similarly, mega-capitalization stocks like Apple (AAPL), Google/Alphabet (GOOG) and Facebook (FB) may continue to elevate the large-cap indexes.

Yet if the Fed’s monetary policy prescriptions falter the way that foreign central bank prescriptions have, then you might want to keep a bit more cash on hand than usual. You cannot buy the big bad dippers without the “dry powder” to do so.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Global manufacturing data have been exceedingly grim. One would be hard-pressed to find a country in Europe, Asia or North America that is exporting products with little difficulty.

If the United States wishes to export products at a higher clip, we’d require partners with the means to afford our products. Yet the U.S. dollar’s strength alongside foreign tariffs are impeding the process.

One might think that the dollar’s strength would be helpful in importing products from other countries. At the moment, however, a wide range of imported goods have been tagged with tariffs that wind up costing end-using consumers a whole lot more money.

For the most part, the U.S. consumer has been strong and resilient. On the other hand, if we’re not acquiring enough goods from places like the United Kingdom and Germany, it may adversely affect jobs stateside.

Consider the manufacturing recessions that are burgeoning in Europe. (See the charts below.) Readings below 50 represent contraction.

Notice that I have not even mentioned the elephant in the global room: China. The world’s 2nd largest economy is not just our trading partner, but it is pivotal in nearly everything that transpires across the Asia-Pacific region.

The fact that China’s economy is now growing at its slowest pace in 27 years is downright devastating. One might even take notice that the last two times that Chinese GDP fell to these levels — 2000 and 2008 — the U.S. experience significant economic downturns.

Importantly, the U.S. manufacturing segment recently began contracting like the rest of the world.  Some may dismiss the reality because we are a consumer-oriented society. Others may point to the recessionary pressures in U.S. manufacturing from 2013 and 2016, where broader based contraction did not come to pass.

There are differences, however. Throughout the early 2010s, the U.S. engaged in “emergency” level stimulus with zero percent rate policy and quantitative easing. In a similar vein, nearly every major central bank in the world “double-downed” on more quantitative easing stimulus (QE) in 2016. What’s more, in 2016, fiscal stimulus via tax cut promises occurred alongside a Republican sweep of the branches of government.

Here in 2019, Congress is unlikely to authorize any fiscal packages prior to the 2020 election. As for monetary stimulus, dissent at the Federal Reserve would likely restrict voting members to a more subtle rate cutting trajectory.  They’d require more evidence of an industry-wide recession that has spread beyond manufacturing before throwing in the towel and kick-starting more QE.

Still, it is clear that the U.S. manufacturing slowdown is adversely impacting the U.S. economy at large. Take a look at the rather dramatic slide in S&P 500 per share estimates in 2019.

An optimist might choose to look at the absolute levels of the S&P 500. A mere 3% off of all-time highs? Surely U.S. stocks would be down much more than that if we were closing in on an industry-wide recession beyond the manufacturing segment. Wouldn’t they?

It is worth remembering that the S&P 500 was only 5% off of its all-time record at the time that the Great Recession began in December of 2007. It is also worth remembering that the experts in charge of identifying receptions were nearly 12 months late in declaring the Great Recession’s reception. It was not until 12/1/2008 when NBER finally announced that a recession had started roughly one year earlier.

It is fair to say that we may be underestimating the impact of a worldwide slowdown on the U.S. economy and U.S. asset prices. Some will tell you that $17 trillion in negative interest rate bonds are not suggesting that something’s awry. Others will dismiss the fact that every maturity on the U.S. treasury curve has inverted below the overnight lending rate.

Is the global bond market truly wrong? Or have U.S. large cap stocks simply stayed late at a party that actually ended more than 19 months ago in January of 2018?

Credit spreads between Treasury bonds and corporate bonds tend to widen significantly before a full-fledged recession. One has come to expect a widening of roughly 500 basis points. The reality that spreads remain tight and that a flight away from corporate bonds has yet to occur is a prominent positive for risk takers.

Still, a reversal could happen very quickly. Moreover, the bulk of data, including the resurgence of gold, is hinting at some amount of risk reduction.

For the bulk of my near-retiree and retiree client base, we still maintain roughly 48%-50% in equity, including assets like Vanguard Dividend Appreciation (VIG), iShares Minimum Volatility Global (ACWV), iShares US REIT (USRT) and Vanguard MegaCap (MGC). We also see value in a few individual companies like Johnson and Johnson (JNJ).

In the income space, we have a wide variety of preferreds, including Van Eck Preferred EX Financial (PFXF) and individual names like STANLEY BLACK & DECKER INC 5.75% PRF 2052 (SWJ). We’ve also held onto income mainstays such as IShares Core US Treasury (GOVT) as well as iShares Aaa-A Rated Corporate Bond (QLTA), as well as cash equivalents like SPDR Bloomberg Barclays 1-3 Month T-Bill ETF  (BIL).

Keep in mind, if we believed that we were early in the credit cycle, we would likely be looking for 65% growth/35% income as well as a much wider array of risk assets. However, the likelihood is that we are very late in the credit cycle. This means we are keenly aware of the potential for things to devolve. We would not hesitate to cut our allocation to stock and other risks if our outlook called for greater portfolio protection.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Near the bottom of the 2008 financial collapse, many investors convinced themselves that Barack Obama’s left-leaning ideology would only make things worse for the stock market. They were wrong. Indeed, those folks missed a remarkable opportunity to acquire equities at phenomenal bargains.

Leading into the 2016 election, plenty of people believed that Donald Trump’s unpredictable nature and tempestuous style would result in a stock market disaster. They were wrong too. Wall Street quickly warmed up to the prospect for dramatic reductions in corporate taxes, sending stocks skyward.

For more than three decades, I have counseled investors to put aside their political feelings. Those emotions rarely prove beneficial. Instead, folks ought to focus on fundamental valuation, the business cycle (a.k.a. “credit cycle”) and technical trends.

As we barrel toward the 2020 election, however, I must acknowledge the uniqueness of the risks. Would a Democrat sweep in Congress result in the rolling back of tax reform? The possibility of higher corporate tax rates would further aggravate the “E” in P/E at a time when most metrics already point to dramatic overvaluation and an earnings slowdown.

In a similar vein, the trade war has adversely impacted the profits at scores of U.S. corporations with sizable overseas operations. Could Trump’s reelection contribute to global economic contraction? At a moment when the global economy is clearly on the ropes, there may be a tipping point whereby a recession in 2020 or 2021 becomes an inevitability.

Another undeniable brick in the wall of worry? Both parties seem oblivious to the dangers of quantitative easing (QE) and ultra-low interest rate policies. Yet both Dems and Repubs would welcome short-term adrenaline boosts by the Federal Reserve. Regardless of the way it creates malinvestment and bubbles. Regardless of the way it destroys saving and fosters excessive borrowing.

Keep in mind, former Fed Chairman Alan Greenspan has exclaimed that the U.S. will definitely resort to negative interest rates in the future. Just like Europe. Since negative interest rate policy became the norm at the European Central Bank (ECB), the damage to European financial firms is undeniable.

Would the U.S. stock market really be okay if the European banking segment failed to survive? Is our exposure genuinely negligible?

Granted, commentators love to say that stocks climb the proverbial “Wall of Worry.” Then again, a time always comes when there are a few too many bricks.

Consider these additional warning signs:

1. Junk Bonds. The risk in the high-yield bond market may have reached its highest level since crashing oil prices hit energy company debt in 2016. In particular, the U.S. distress ratio, which is the proportion of junk bonds that yield more than 10% above comparable Treasury bonds, leaped to 9.4% in August.

2.  Earnings Growth (or lack thereof). According to FactSet, the estimated earnings decline for the S&P 500 for Q3 2019 is -3.6%. Granted, the negative bar may make it possible for companies to easily beat expectations. On the other hand, if we see an actual year-over-year decline for Q3, that would be three quarters of negative earnings growth in a row for the heralded index.

3. Consumer Confidence. The brightest spot in all of the U.S. economy has been the willingness of the consumer to spend. People are working. And people are spending. Yet consumer confidence indicators have been diverging, with the Conference Board’s reading sitting near highs and the University of Michigan’s sentiment moving sharply lower.

4. Corporate Spending. Nobody knows more about the capital spending intentions of corporations than Chief Financial Officers. So when 67% of U.S. CFOs anticipate that the U.S. will be “in recession” by Q3 2020, and 84% by Q1 2021, the data are probably telling.

5. Recession Indications. Speaking of the probability that a recession will occur within the next 12 months, perhaps in Q3 2020, the New York Fed’s model reached 37.3%. Think that’s low? Think again. While recessions have occurred without ever getting as high as 35% on the Fed model, or 37.3%, they’ve ALWAYS occurred in conjunction with the model hitting these percentage levels or shortly thereafter. (See the orange line below.)

Additionally, the Organization for Economic Cooperation and Development (OECD) provides a composite leading indicator for identifying turning points in business cycles. The U.S. is currently at its lowest point since 2009. What’s more, the last time that the indicator breached 99 on the downside, the 2008 Great Recession was underway.

Naturally, a host of articles have been written about the inverted yield curve and the likelihood of recession. For that matter, many export-dependent countries are already in recession. I won’t repeat the discussion here.

Nevertheless, there is uncertainty about everything from Federal Reserve policy to global trade skirmishes with China, from corporate earnings to European economic malaise, from consumer retrenchment to potentially damaging ramifications in the political theater. It may be naive to ignore the Wall of Worry entirely.

Expect a downward pressure on interest rates to resume, regardless if the Fed is foolish enough to utter the words, “mid-cycle adjustment.” Real estate investment trusts (REITS) continue to benefit. Preferred stock shares do as well.

In fact, you may want to look at “REIT Preferreds” if you are wary of the riskier REIT holding. Take a look at possibilities such as Digital Realty Trust Inc Preferred Series I (DLR-I) and CorEnergy Infrastructure Trust Dep Shares Preferred Series A (CORR-A).

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

One year ago, investors learned that there’s a limit to how high interest rates could climb on Federal Reserve tightening before the stock market would collapse. Mercifully, the Fed reversed course and sent risk assets back to new heights.

Rightly or wrongly, Federal Reserve committee members are still choosing to manipulate the cost of capital lower. The hope is that by keeping stock prices at elevated levels, consumers and businesses will both spend in ways that keep the economic expansion alive.

The fear? A rapidly deteriorating stock market would erode consumer and business confidence, leading to a recession.

Despite easy money Fed policies, executives in corporate America may already be losing faith. The CEO Confidence Index, a measure of CEO sentiment about the economy 12 months into the future, has been waning.

In a similar vein, executives seem to be acting on those sentiments. How? They’re selling their personal shares at the fastest pace since the tech bubble burst in 2000.

Are these corporate insiders onto something? Traditional metrics suggest that overvaluation, while not quite as alarming as it had been in 2000, may be more severe than it was in 1929 or 2008.

There’s more.

Back in 2000, the dot-com IPO train derailed before the rest of stock market felt the pain. Today? Participants are rethinking astronomical valuations for companies that struggle to turn profits.

Uber, WeWork, Peleton, Crowdstrike. Are they really worth it? Even the Renaissance IPO ETF (IPO) is hinting at a pullback.

Some blame Trump’s trade war for the downturn in business leader confidence as well as the trepidation in the IPO world. Others suggest that the electability of Elizabeth Warren is bad for stocks due to a likelihood of higher taxes and the reversal of corporate tax reductions.

Both may be at play.

Nevertheless, the stock market has been noticeably calm as of late. Some might even call it, “complacent.”

Consider the relationship between the short term volatility measure (VXST) and the CBOE Volatility Index (VIX). According to Dana Lyons, since the inception of the VXST in 2011, there have been a mere 3 instances where the VXST:VIX ratio dropped below .70. At a reading of 0.659 on September 23, the ratio registered its lowest reading ever.

It’s not that stocks can’t get beyond mounting concerns. On the flip side, I  continue to emphasize “safer” spaces for a late-stage business cycle.

For example, the electric power holding company Duke Energy offers 5.125% Junior Subordinated Debentures (DUKH) issued in $25 denominations. A 5% yield and an investment grade rating for a utility is not too shabby when 10-year U.S. Treasuries offer 1.68%.

Similarly, ETF enthusiasts have seen capital appreciation as well a 5%-plus income stream in the preferred arena. Throughout the year, I have pointed to VanEck Vectors Preferred Securities ex Financials ETF (PFXF).

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Many investors are aware that the current economic expansion is the longest in U.S. history. 10 years and six months.

Some believe that the growth does not need to end. Ever. They quip, “Economic expansions don’t die of old age.”

Others wonder if the business cycle will end soon. After all, every decade on record has experienced at least one recession.

The problem with focusing on when the next recession will occur? It assumes that asset prices decline dramatically because an economy shrinks. That has not been the case in the 21^st century.

Here in the 21^st century, causation has been turned on its head. Recessions did not cause stocks, bonds and real estate to get crushed; rather, asset price decimation caused the recessions that transpired.

Consider the 2001 recession. It came about due to the bursting of the tech bubble in March of 2000. Severe stock price depreciation, particularly in dot-com names, led to the layoff of millions of employees and to a painful pullback in consumer spending. Indeed, a vicious bear had been clobbering stocks for a full year prior to the 2001 recession.

What about the Great Recession (12/2007-5-2009)? The housing bubble actually burst in the first quarter of 2007, 10 months prior to the December time stamp. What’s more, it wasn’t until late in the 3^rd quarter of 2008 that recessionary pressures were being acknowledged.

Voting members of the Federal Reserve understand this 21^st century dynamic. Not surprisingly, then, committee members will do whatever it takes to keep asset prices afloat.

Most recently, the Fed began “QE4.” Nobody wants to call it that. Yet when a central bank creates trillions of electronic dollar credits out of thin air to buy assets, and never gets rid of those credits, the central bank has engaged in electronic money printing.

The Federal Reserve is purchasing $60 billion a month in securities from the open market. That’s as much quantitative easing (QE) as what occurred during the financial crisis in 2008. The question people should be asking is what emergency currently exists such that the Fed needs a new program of asset purchasing straight through the 2nd quarter of 2020?

The Fed wants the new “money” to wind up in stocks, bonds and real estate. That is how they hope to extend the longest expansion in history. Never mind the fact that manipulating interest rates lower makes it possible for consumers, businesses and governments to borrow for even less.

What could possibly go wrong?

There are those who maintain that the Fed is being sensible. Yet they’re ignoring the adverse impact on future returns for bond holders and savers. Even worse? When short-, medium- and long-term rates are as depressed as they are, retirees and near-retirees feel coerced into taking on larger risks to meet needs.

What about the future return prospects for equities? At current valuation levels, the next decade could offer a whole lot of risk and not much in the way of gain.

There’s more. Corporate earnings will likely shrink for a third consecutive quarter. That could make stock valuations even foamier.

It is also worth remembering that large-cap U.S. stock enthusiasm is not matched by smaller companies. The Russell 2000 Small Cap Index has been in a rut for over a year. In fact, prices are 12.3% LOWER than they were at their peak in September of 2018.

One explanation? Small business confidence has been dropping precipitously. It recently registered a 7-year low.

Indeed, investors may already be bracing for atrocious losses. Assets with lower perceived risk have been garnering the lion’s share of investment dollars throughout 2019.

If you are nearing retirement, there are no easy answers. A traditional portfolio of stocks and bonds — 60/40, 50/50 — may go nowhere for a decade. Or bearish losses may take the better part of the next 7-10 years to recover.

Dividend income may be reliable from the highest quality names, particularly the “dividend aristocrats.” Yet few folks will be giddy about a 2.5%-3% annual income stream should bear market price losses hit 35%, 40% or 50%. (And can you really count on a 5-year break-even time horizon?)

Despite the fact that rate-sensitive investments (e.g., dividends, REITs, utilities, preferred stock, etc.) are part of a “crowded trade,” I still favor them. I like exchange-traded trackers such as SPDR S&P Dividend ETF (SDY), iShares Core REIT ETF (USRT) and Van Eck Market Vectors Preferred Ex Financials (PFXF).

Nevertheless, I am aware that the positioning is a crowded one and that tactical asset allocation changes will become necessary.  “Hope-n-hold-everything” may work for some folks. Others can appreciate the power of losing less in a violent market meltdown.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Can you force credit on those who are not necessarily asking for it? Even at ultra-low rates?

Consider homebuyers. Mortgage rates are dramatically lower than they were a year ago. Regardless, the median new home sales price has had to drop significantly to entice fresh borrowing.

At some point, consumers and businesses may choose to avoid more debt altogether. It simply won’t matter how cheap the cost of capital becomes. (That’s what transpires during a recession.)

In truth, we’ve already seen the ill-effects of negative rate policy in Europe and Japan. Ex U.S. businesses have not taken the bait. The unwillingness of ex U.S. companies to borrow in the debt markets for the purpose of buying back stock shares partially explains why a global bear has persisted since January of 2018.

Since January 2018, ex U.S. stocks have yet to recover and remain down more than 10% from highs. Meanwhile, even small stocks in the U.S. Russell 2000 Index are negative over one year and nine months.

Granted, the S&P 500 may have gained close to 5% in a market-cap weighted capacity. Nevertheless, one would have done better over the past 21 months with 100% in “risk-free” intermediate-term U.S. Treasuries via iShares 7-10 Year Treasury Bond (IEF).

From an individual sector standpoint, U.S. financials, industrials, materials and energy are negative since January 2018 as well. That has a lot to do with the worldwide manufacturing slowdown.

“But Gary,” some say. “U.S. stocks have been remarkably resilient, and they’re poised to break out to all-time record highs.” Maybe.

Naturally, stocks could pop on trade deals. For that matter, economic growth around the world could make a comeback. Yet this remains in the category of “hope,” and it certainly does not constitute an investment strategy.

On the flip side, just how much Federal Reserve manipulation has been necessary to avoid a wealth effect reversal? First, we went from rate hikes to rate neutrality at the start of 2019, augmented by an end date on quantitative tightening (QT). Less than six months later, Jerome Powell, chairman of the Fed, began promising rate cuts.

Not only did we get rate cut 1, and rate cut 2. We’re getting a third one here in October.

But wait. There’s more. The Fed started a massive QE4 program to acquire treasury bills so that more liquidity would end up in risk assets.

Talk about monetary policy stimulus! The Fed has increased its balance sheet by $200 billion in the last month alone!

It’s not difficult to see why financial assets of all stripes are hanging in there. “Money” continues to make its way into risk.

What is more difficult to see is the other side of this equation. Specifically, with everything from trillions in government deficit spending to corporate stock buybacks to mountainous levels of Fed stimulus, why has the U.S. stock market barely made progress since January of 2018?

The answer may not be as straightforward as one would like. Recession fears. Political uncertainty. Geopolitical strife.

That said, those who I speak with in and around “Wall Street” currently fret about the strong prospect of an Elizabeth Warren agenda. What’s more, scores of candidates on the Democrat side of the aisle openly discuss unraveling Trump administration policies, from deregulation to corporate tax cuts.

In other words, monetary policy may be a phenomenal driver for asset prices. But the threat of monumental changes at the fiscal level could be a straw that breaks the asset camel’s back. (Note: This is not political commentary, but rather, a discussion of “possible” stock and bond market ramifications.)

Nobody knows who will control the U.S. Congress. Or for that matter, who will will win the presidential election in 2020.

Still, I am willing to make a relatively bold prediction. With the Fed’s increasingly aggressive intentions, alongside recessionary concerns and an uncertain election, the U.S. 10-year yield will fall below 1%.

75 basis points and a modicum of yield might not seem like it will produce an extraordinary total return. Maybe we are talking about 5%-7% on iShares 7-10 Year Treasuries (IEF).

Then again, I do not have the same confidence that, prior to the outcome of the 2020 decision(s), U.S. stocks will hold at levels that are 5%-10% higher than they are today. Even if they go up 10% to close out to 2019, they’d likely be reined back in before October 24th of 2020.

It is true that Federal Reserve QE has been incredible in boosting risk assets in the past. However, I am not a believer in the notion that the Fed has repealed the business cycle. As I wrote earlier, there comes a time when the Fed won’t be able to force credit on those who choose to refuse it.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

The U.S. economy is appallingly dependent on the “wealth effect.” And the U.S. Federal Reserve knows it.

Just how “easy” is the Fed’s monetary policy? The real Fed Funds Rate (FFR) is at -0.8% right now. The last time the inflation-adjusted FFR was down at -0.8% had been 8-9 months into the Great Recession (10/2008). Before that, the country had been 8-9 months into the 2001 recession (12/2001).

Pushing the cost of capital to insanely cheap places used to be a tool for alleviating recessionary pressure. Today? The central bank of the United States believes in the permanence of cheap credit to maintain elevated levels of stock, bond and real estate prices.

The proof of financialization is in the bread pudding. Never in the history of the U.S. economy has the ratio of household assets to nominal gross domestic product (GDP) reached 4.25.

It’s not just the reality that asset price inflation is vital to economic well-being in 2019. Previous wealth effect reversals occurred because of an over-reliance on respective asset bubbles in stocks in 2000 and real estate in 2008. (See the orange lines in the chart above.)

Unfortunately, most of the Federal Reserve committee members only see the “benefits” of the present-day wealth effect. Few of them show any concern about the eventuality of an ugly reversal.

Never mind the probability that the Fed will not have enough ammunition for a crisis or recession. All-star economists are notoriously poor at alerting folks when a recession is happening. In particular, the average number of months between the inception of economic contraction and a pronouncement by the National Bureau of Economic Research (NBER)? 9 months.

Granted, people keep on spending in ways that is keeping the current expansion alive. Indeed, the recent 1.9% GDP print was entirely attributable to the resilience of the consumer.

On the flip side, consumers have rarely been as pessimistic about the economic future. The difference between present day circumstances and future expectations are nearly as bleak as they were leading into the 2001 recession. They are even more stark than they were leading into the Great Recession of 2008.

Businesses are already glum. A broad measure of job gains in a survey by the National Association for Business Economics (NABE) is at its lowest level since 2012. Meanwhile, according to Jon Hill at BMO Capital, CEO confidence hasn’t been this low without the economy entering recession or already mired in one.

Small companies may be struggling the most. The proportion of non-earners within the Russell 2000 is getting closer and closer to 30%. Jill Carey Hall at Bank of America Merrill Lynch points out that these levels are usually seen during economic downturns.

Of course, none of the troubling specifics imply immediate doom for stocks, corporate bonds, real estate or other risk assets. Chairman of the Fed, Jay Powell, has been keeping the asset price dream alive with three consecutive rate cuts and $60B-plus in monthly treasury bill purchases — a quantitative easing (QE) elixir where the electronic dollar credits eventually find their way into riskier investments.

Think about it. Not only is the FFR stimulus as accommodating as it was during the 2001 recession as well as the Great Recession in 2008, but the Fed’s balance sheet is now back above $4 trillion. (They just keep right on cranking the electronic money printing press!)

Perhaps ironically, capital spending at corporations continues to weaken and earnings continue to slide. It follows that wildly optimistic earnings estimates for 2020 will need to be slashed, pressuring valuations. And those valuations are already pricey.

Can Fed actions and the actions of other major central banks (e.g., European Central Bank, People’s Bank of China, etc.) really keep U.S. asset prices elevated indefinitely? In spite of late cycle indications? Many in the financial media seem to think so.

However, it is more likely that a shock to the system will trigger a wealth effect reversal. And with it, another recession.

Until that time, though, investors still need to allocate a percentage of their assets to equities. Here are three ways that one may do so, even if the stock bull is close to meeting its maker:

1. Defined Outcome ETFs. Would you willingly cap your upside in the S&P 500 over the next 12 months if it meant you would not experience any losses on the first 15% of a market sell-off? The Innovator S&P 500 Power Buffer ETF (PNOV) seeks to track the return of the S&P 500 Price Return Index up to 8.75% (10/31/19), while buffering investors against the first 15% of losses over the next year (11/1/19-10/31/20).

The cap and the buffer have already changed from PNOV’s inception. At the moment (11/4/2019), with stocks gaining ground on 11/1 and 11/4, the cap is 8% and the buffer is 15.5%. The downside before the buffer would kick in is -0.72%.

2. Trend ETFs. Some folks would prefer to capture all of the market’s upside potential. After all, who knows how “bubblicious” equity indexes will get in the year ahead. Still, is there a mechanism for protecting gains or limiting losses within an equity investment itself?

Enter Pacer’s Trendpilot US Large Cap ETF (PTLC).  As long as the market is trending higher, you’re in there. Should a short-term market downtrend develop, PTLC pares back some of its equity exposure. And if the market signals a longer-term downtrend? PTLC shifts its allocation to the safety of treasury bills.

I am a fan of paying attention to technical trends. Long-time readers know that I am particularly fond of the slope of the S&P 500’s 10-month simple moving average (SMA) as well as its monthly close. The monthly close on the 10-month SMA helped me sidestep the bulk of the carnage in 2000 as well as 2008.

3. Value ETFs/Dividend Aristocrat ETFs. It’s not that value stocks and dividend aristocrat stocks represent bona fide bargains; rather, they are relative bargains to the growth stock bonanza that has characterized this decade.

If you’re like me, and you think that the Fed will not be able to override the business cycle altogether, then you might appreciate the SPDR S&P Dividend ETF (SDY) for tracking the total return performance of the S&P High Yield Dividend Aristocrats Index. (The “aristocrats” in this index have a 20-year track record of consecutive dividend increases.)

From a technical perspective, the SPDR S&P Dividend ETF (SDY):Nasdaq 100 (QQQ) price ratio is showing a “bottoming process” for SDY. Going forward, SDY is likely to outperform.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Stock market records have a way of enthralling everyone. However, the stock market is not currently reflecting the economy or the corporate backdrop.

For example, one may hear that the job market is strong. Yet job growth and job openings are both fading.

One may be told that the consumer is spending. On the other hand, year-over-year retail sales (2.88%) are well below last year (4.58%).

In a similar vein, The Bloomberg Consumer Comfort Index fell to a nine-month low of 58. The measure even posted its steepest three-week slide since 2008.

Meanwhile, manufacturing remains mired in an outright slump. The most recent data on industrial production came in at a three and a half year low.

There’s a straightforward reason why the Federal Reserve cut its overnight lending rate three consecutive times. It did so because the economy is shaky.

Would Fed committee members be looking to provide monetary stimulus if prospects were wonderful? Keep in mind, the Fed is projecting fourth quarter economic growth at just 0.4%.

Corporations are hardly bucking the economic trend. Earnings have been negative for three consecutive quarters. It is likely to be negative for all of 2019.

Equally disturbing? CEO confidence has slipped to levels that preceded the prior four recessions.

Why, then, is the stock market breaking higher? With six straight weeks of upward movement? Massive inflows of central bank liquidity.

Just one year ago, stocks were free-falling. It was happening because the Fed had planned to hike rates throughout 2019 and had intended to reduce the size of its balance sheet (a.k.a. “quantitative tightening” or “QT”) into 2020.

Instead, overnight lending rates were slashed in 2019. And when that did not satisfy financial market participants, the Fed began pumping hundreds of billions back into the system (a.k.a. “quantitative easing” or “QE”). Stocks have been rocking ever since!

With the Fed throwing monetary spaghetti at the “Wall,” nobody wants to be caught short. Consider the CBOE Equity Put Call Ratio. According to Dana Lyons, the measure just registered one of its lowest readings (<0.50) in a half-decade.

Other signs of giddiness? Investors Intelligence reported advisory sentiment at 57% bulls versus 18% bears. And Citi’s Greed Fear Index recently moved into “extreme greed” territory.

Historically speaking, irrational stock market enthusiasm has been a time to reduce risk, not take substantially more of it. The best time to embrace risk with everything you’ve got? When there is panic and hopelessness.

Is this time different? After all, the Fed’s injections of liquidity have trumped the need for corporations to increase their profits. In many instances, profitless corporations without a path to profitability have still seen their shares soar.

The price one pays for bottom line earnings has become irrelevant. What about revenue? The price one pays for corporate sales is as insane as it was during the turn-of-the century stock bubble.

Some of us remember when Warren Buffett described market cap to GDP as the best indicator of whether stocks are overvalued or undervalued. In the era of QE, though, valuation has been little more than a quaint concept.

What will happen when over-leveraged, profit-challenged corporations struggle to generate business and scramble to pay debts? Companies will freeze hiring and, eventually, announce layoffs.

It may not happen all at once in crisis-like fashion. Still, employees and independent contractors will become concerned about their pay and consume less.

Investors may need to ask themselves, will the Fed have enough ammunition to prevent the economy from stagnating? From shrinking? Can their actions prop up stocks indefinitely, or is it more plausible that a “wealth effect reversal” occurs in spite of monetary policy magic?

Many agree with the notion that the Fed has created a super-sized asset balloon. On the flip side, some of these folks cannot see a pin prick in their front-view windshields.

It follows that they’re not inclined to ratchet down their exposure to risk assets. Instead, they think they can get out before a mad rush for the exits.

Some will. Some won’t.

I would argue that it does not matter what pops the balloon to lead to the next bear in stocks. It could be a loss of faith in foreign central banks or a loss of faith in Federal Reserve policy (e.g., too little QE, too much QE, too slow with stimulus, too fast with stimulus, etc.). It could be an unwinding of leverage from the leveraged loan arena to margin debt to BBB-rated corporate downgrades. It could be a sharp shift away from stock buybacks. It could be a chain reaction of negative sentiment surrounding “unicorns.”

It could be almost anything. And in all likelihood, it will be identified in hindsight.

Identifying the pin or pins beforehand is less critical than having a plan for a dangerous downturn. That plan should incorporate hedging one’s exposure to common stock as well as reducing one’s exposure.

The most effective hedges tend to be a combination of the highest “quality” government bonds, precious metals like gold and currencies like the dollar. ETFs like iShares 20+ Year Treasury Bond (TLT), iShares 7-10 Year Treasury Bond (IEF), SPDR Gold Shares (GLD) and Invesco DB Dollar Bullish (UUP) provided non-correlation with U.S. stocks and protection against capital depreciation in 2008.

If you are concerned that hedging alone won’t do the trick, consider Pacer’s Trendpilot US Large Cap ETF (PTLC). It participates in technical market uptrends while systematically shifting to T-bills if technical trends turn down.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.

Does the stock market care about the after-tax profits generated by corporations? Not in the era of Federal Reserve QE (a.k.a. “quantitative easing,” “balance sheet expansion” or “electronic money printing.”)

Over the last five years, stock prices for the S&P 500 have gained more than 50%. Meanwhile, after-tax profits at non-financial companies have actually declined in the period. Is that sustainable?

Credit the Fed for its QE-inspired wealth effect.

Some believe that the Fed stopped QE when they halted purchases with the creation of new electronic credits at the end of October 2014. However, a more nuanced explanation is that the Fed maintained QE levels above $4 trillion straight through the start of 2018. Maintaining an elevated balance sheet with the aid of trillions of reinvested dollar credits is still QE.

There was a small amount of tapering in 2017. Yet that was offset by corporate tax reform stimulus. In 2018, the Fed attempted to reduce its balance sheet in earnest. Then the S&P 500 fell 19.9% in Q4.

What did the central bank of the U.S. do to resurrect the wealth effect? It completely flip-flopped on everything from interest rates to what it should do with its balance sheet.

Instead of raising rates four times in 2019, they slashed rates three times. And, not surprisingly, the Fed’s “funny money” balance sheet has puffed back up to $4.1 trillion.

Without a doubt, the Fed’s easy money liquidity has been the driver for 2019’s stock market recovery and subsequent record highs. Profits? Earnings per share (EPS) actually decreased in 2019.

Granted, there have been stretches in history when financial markets disregard profit trends. When it has happened, though, stock valuations became bubbly.

Objective measures for asset price valuations — price-to earnings (P/E), P/E 10, market-cap-to-GDP, price-to-sales, Q Ratio, regression-to-trend — have been pointing to extremely overvalued conditions for years. Circumstances may not be as fizzy as they were in the year 2000, though they are frothier than they were in 1929 and 2008.

The uninformed response to the data is that traditional valuations do not account for “ultra-low” interest rates. On the other hand, one can easily debunk the myth that low interest rates alone justify extreme valuations.

Consider the fact that the U.S. experienced a similar low interest rate regime for 20 years from 1935-1954. Traditional valuation metrics did not reach the extraordinary heights of 1929, 2000, 2008 or 2019 during the 20-year period from 1935-1954. (See the chart above.)

There’s more.

Economic growth was far greater during the 1935-1954 period than it has been in this decade. Nevertheless, the ultra-low rates in those years still did not derail bear markets from occurring in 1937-1938 (-49.1%), 1938-1939 (-23.3%), 1939-1942 (-40.4%), or 1946-1947 (-23.2%).

Investors need to see the current environment for what it is — a QE-fueled wealth effect.

Think about it. How does the Fed hope to stimulate job growth and achieve stable inflationary targets? The members of its voting committee look to push up asset prices to make consumers and businesses feel wealthier and, subsequently, spend money.

Businesses did some spending, of course. Yet less had been allocated to human resources and capital expenditures than to stock buybacks. Now those corporations have some of the worst debt ratios in their history.

Consumers have been the true saviors. They still have jobs, so they keep on spending.

Still, the signs that consumers may spend less are evident. Job growth is waning, year-over-year retail sales are slowing and expectations about the economic future are falling. In fact, the gap between present circumstances and future expectations is worse than it was in 2008 and nearly as bad as it was in 2000.

If the economy stagnates, or if the bond market sniffs out ongoing weakness, the Fed will continue to increase its balance sheet and cut overnight lending rates even more. Voting members have no other plan.

Many wonder what the catalyst for a wealth effect reversal might be. Yet a catalyst may not be easily identifiable  and it may not be singular.

Keep in mind, there is no agreed-upon catalyst for the bursting of 2000’s tech bubble. The Fed was too loose with policy in the late 1990s? Then hiked rates too far? Then cut too slowly? That’s part of the story.

It follows that a combination of factors can come together to produce a rapid unwinding. Here are a handful of potential contributors (in no particular order):

1. Fed Policy Error. Asset prices may fall because the markets become dissatisfied with the pace of QE or the amount of QE or any other aspect of policy (e.g., rates, forward guidance, inadequacy of a new tool, etc.).

2. Market Uneasiness Over Unsustainable Borrowing Cost Path. Clear across the world, inflation-adjusted interest rates are negative. That which led to over-borrowing could serve as a direct or indirect catalyst, particularly as it relates to the possibility of a fallout from a downgrading of BBB-rated corporates and/or a crisis in the leveraged loan arena.

3. Fewer and Fewer Share Buybacks. Corporations borrowed by the boat load to shovel the money back into their stock shares. That support is already slowing, with share buybacks 30% lower in 2019 than in 2018.

4. Complete Loss of Faith in Global Trade. The global manufacturing recession may become contagious. Tariff removal and trade deals may come along too late, or never amount to anything meaningful. Four consecutive ISM readings below 50 raises the risk of a pile-up in layoffs.

5. A 4.1% U-2 Unemployment Rate. “Are you nuts, Gary? 4.1% is remarkably low in the history of this country.” That may be true, yet it also represents a 0.5% rise above the cyclical low of 3.6%. Every recession since 1970 occurred when the three-month average unemployment rate rose at least 0.5% from its 12-month low.

None of the aforementioned contributors have occurred… yet. Any or all of them could occur in 2020.

One of the ways that an investor can still participate in market upside with less fear about a bearish wipe-out is with a “Defined Outcome ETF.” For example, December’s incarnation of the Innovator S&P 500 Power Buffer ETF (PDEC) seeks to track the return of the S&P 500 Price Return Index up to 8.92% (12/04/19) at a price of 26.33, while buffering investors against 14.56% of losses through 11/30/2020.

Income-oriented investors may be more inclined to stick with dividend aristocrats that have raised their dividends for 40-plus years. Talk about reliability through thin and thick!

Johnson & Johnson (JNJ), PepsiCo (PEP) and Clorox (CLX) “screen” more favorably than others. That said, none of them are inherently cheap.

Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.