Are Stock ETF Investors Placing Too Much Faith In The Fed?

“The contraction in the first quarter is not reflective of the underlying state of the U.S. economy and the subsequent flow of data points to a significant snap-back in the second quarter,” explained the chief economist at Regions Financial. Keep in mind, Richard Moody, like the overwhelming majority of economic pundits, projected rising interest rates in 2014. Not only has the 10-year yield dropped a whopping 50 basis points, but investors who counted on the popular sentiment missed out on the most successful asset class for the first half of 2014 — longer-term bonds.

Mr. Moody may or may not have led you astray, but he certainly was not alone in believing that rates could only go higher. And he certainly is not alone in believing gross domestic product (GDP) will “snap back” in the second quarter. However, Mr. Moody may have a problem. For one thing, inflation-adjusted spending declined over the last few months. That cannot be a strong sign for the U.S. where up to two-thirds of economic growth depends on consumer expenditures. What’s more, scores of Wall Street firms have revised their second quarter estimates downward. Barclays slashed a 4.0% expectation down to 2.9% whereas RBS sliced its target down to 2.2% from 2.7%

Should second quarter growth approximate 3.0%, the increase would certainly constitute a rebound. That kind of number would validate Mr. Moody’s conviction. Yet few have even bothered to question the evolution of how bullish commentators changed their rationale for the disastrous 1st quarter results. Two months ago, it was the weather’s fault. One month later, the data had been revised lower, and commentators expressed that backward-looking data has limited value. After the third revision of GDP served up an abysmal contraction (-2.9%), bullish economists began talking about the “bounce-back.” Anything to justify rising asset prices?

Personally, I am still wondering whether or not investors even care what our economic path is. If stocks can actually rally on the day that we learn that the economy sharply contracted (-2.9%) in the initial quarter of 2014, why would it matter whether we see GDP estimates of 2.0%, 2.5% or 3.0% for Q2? Investors have placed their complete faith and trust in the world’s central banks to keep rates subdued for years to come.

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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 ...

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