Romney or Obama – 7 Reasons Why the Next 4 Years Will be Lousy for Stocks Regardless

The U.S. presidential campaign is nearing its end and there are some compelling reasons to actually vote for the presidential candidate you like least.

This Bloomberg headline caught my attention: “Economy set for better times whether Obama or Romney wins.”

The commentary brings out that: “No matter who wins the election tomorrow, the economy is on course to enjoy faster growth in the next four years as the headwinds that have held it back turn into tailwinds.”

From Headwind to Hurricane?

Optimism without realism is just wishful thinking and unfortunately the article lacked any factual evidence pointing to a sustainably strengthening economy.

In fact, there are many reasons why the headwinds created by the 2008 near financial collapse will turn into a hurricane, not tailwinds.

1) Artificial Everything: The human body needs nutrients to function at its optimum. Real and organic foods are the best source of nutrients. The 2004 documentary “Super Size Me” shows the body’s reaction to a junk food only diet.

Like the human body, the economy needs real and organic growth to function at its optimum, but all it’s getting is junk food mixed with steroids. Artificial earnings growth, artificial GDP growth, and artificial jobs creation result in an artificial stock market. The sugar crash is coming.

2) Fiscal Cliff: Financial engineering has become the top U.S. industry sector, but despite the abundance of financial engineering talent, there are only two ways to reduce the U.S. deficit: A) Cut government spending and B) Increase taxes.

Both options are as necessary as they are counter productive to an expanding economy.

3) Baby Boomers: Baby boomers were born between 1946 and 1964. More than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years. There are 76 million of them and it is estimated that they account for about 50% of total U.S. spending.

4) Low Interest Rates: Retired baby boomers are reliant on interest rates and dividends to generate income. Interest rates are near all-time lows and generating retirement income is nearly impossible.

Imagine a retired couple with a $1,000,000 nest egg. At best you may find a 1-year CD with a return of 1%. That’s $10,000 a year or $833 a month. Not too long ago you could earn $50,000 a year or $4,166 a month. Retirees will be forced to clam up and hold on to their money if the nest egg is to last.

5) Flight to Junk Investments: Low interest rates force investors into higher yielding vehicles. Those include high yield bonds (more appropriately called junk bonds) and municipal bonds. But there’s no free lunch on Wall Street.

If you want higher returns, you have to take more risk. The iShares iBOXX High Yield Corporate Bond ETF (HYG) and the iShares S&P National AMT-Free Municipal Bond ETF (MUB) have been bid up to near all-time highs.

Financial liquidity is as much about money flow as it is about perception. We’ve seen in 2008 how fast perception can change and how fast junk, muni bonds and even investment grade corporate bonds can drop.

6) Deflation: Japan has been dealing with persistent deflation for decades. Money infusions by the Bank of Japan (Japan’s equivalent to the Federal Reserve) failed to resurrect the economy. Deflation suffocates an economy.

The fact that trillions of dollars worth of U.S. QE money hasn’t caused the expected inflationary environment warns how close the U.S. is to the deflationary spiral.

7) Systematic Problems: A ship with a leak in the hull requires a trip to the wharf. Replacing the captain may quiet uneducated passengers, but it doesn’t fix the problem.

The U.S.S. America (our economic ship) suffers from many “leaks.” A new president, regardless of who it is, can’t fix those leaks.

Like water, Wall Street and Washington always travels the path of least resistance. Unfortunately, the path of least resistance leads to a dead end littered with all the cans that have been kicked down the road.

Like water, the stock market finds small cracks and applies pressure until it bursts. The market has found the economic weaknesses; it’s just a matter of time until the wall of “extend and pretend” breaks.

How will Obama’s election affect stocks? Look at the ship, not the captain.
How will Romney’s election affect stocks? Look at the ship, not the captain.

Simon Maierhofer shares his market analysis and points out high probability, low risk buy/sell recommendations via the Profit Radar Report. Click here for a free trial to Simon’s Profit Radar Report.

Groundbreaking Study – Dividend ETFs are Riskier than the S&P 500 Index

Dividend rich sectors and dividend ETFs are often considered boring and anti-sexy. However, a closer look at past performance shows a surprising twist. The “orphans and widows” deliver more pizzazz and less safety than you’d expect.Investors are scrambling for two things right now: Safety and income.

Safety

Courtesy of the 2008 meltdown stocks lost about 50% and even the persistent stock market rally from the March 2009 low is marred by three corrections of 10 – 20%. Such drops aren’t easy to stomach and retail investors are simply scared of volatility.

Income

The Federal Reserve has publicly stated its objective of keeping interest rates low until 2015 and beyond. This is great for banks and corporations, but investors (especially retirees) are left without income.

The need for income draws many to dividend ETFs. The common perception is that dividend ETFs provide safety and income, but is that really true? Let’s look at the facts.

Dividend ETFs

We will use the iShares Dow Jones Select Dividend ETF (DVY), SPDR S&P Dividend ETF (SDY), and Vanguard Value ETF (VTV) as proxy for dividend ETFs. The current dividend yields are: 3.41% for DVY, 3.14% for SDY, and 2.61% for VTV.

DVY, SDY, and VTV reached their all-time high on May 23, 2007. How did DVY, SDY and VTV handle the 2007 – 2009 stock market crash compared to the S&P 500?

From May 23, 2007 – March 06, 2009 the S&P 500 lost 55.11%. Surely, dividend ETFs should have fared much better, right? Wrong! DVY lost 63.01%, VTV lost 58.59% and SDY slightly “outperformed” the S&P with a loss of “only” 54.83% (see chart below).

Financial Sector – For Better and for Worse

One reason dividend ETFs got slammed by the market crash is their objective of finding dividend paying stocks. The financial sector paid the highest dividends in 2007, 2008, and early 2009.

Financial stocks got hit harder than the broad market. Being focused on dividends during this time was like maxing out your credit card just to earn miles. The cost (or risk) simply wasn’t worth the benefit (or dividend).

Nevertheless, the exposure to financial stocks helped dividend ETFs to a quick recovery in 2009. Although dividend ETFs did a lousy job of preserving their owners capital during the meltdown, they’ve outperformed the S&P 500 Index ever since.

Sector Rotation

From the March 2009 low to the September 14, 2012 high, the S&P 500 was up 114%, DVY gained a stunning 152%, SDY 143%, and VTV 128% (see chart below).

DVY and SDY also did better during the summer 2011 meltdown. Where the S&P 500 lost as much as 21.58%, DVY’s maximum loss was 17.78% and SDY dropped not more than 17.90%. VTV on the other hand fell a whopping 24.30%.

We don’t know the ETF’s top holdings in 2011, but today VTV is the only ETF that still counts financials as its top sector. This probably contributed to the disappointing performance in 2011 (financials lost as much as 36.33% in 2011).

SDY has a 21% stake in consumer staples, which paid off as the SPDR Consumer Staples ETF (XLP) now trades over 20% above its 2007 high. DVY has a 31% stake in utilities and 18% exposure to consumer goods.

Lessons Learned

Who would have thought that dividend ETFs outperform the S&P in an up market and under perform in a down market? Dividend ETFs aren’t bad investment options, but they may not do what “they’re supposed to do.”

Chasing dividend yield rich sectors bears risks, and if you own dividend ETFs solely as a protection against the next sell off, you may want to rethink your strategy.