Why Overvalued Stock ETFs Still Offer Opportunity

Let us recall that every significant economist and every major U.S. investment firm predicted interest rates would climb in 2014. The primary basis for the assessment? U.S. economic growth would accelerate and encourage the Federal Reserve to end ultra-easy monetary measures. Well, now that we’ve seen a so-called acceleration in the second quarter – now that many have thoroughly dismissed the “picking up of slack” for first quarter economic contraction – the same analysts are scrambling to explain why intermediate- and long-term bond yields keep right on falling. (Note: There were a few contrarians who anticipated that bond yields would fall.)

Today, myopia is responsible for yet another misleading forecast; that is, the investment houses all expect economic strength from here on out. The assessment is largely based upon the faulty premise that 200,000 low-paying and/or part-time positions per month is better than a sharp stick in the cornea. On the other hand, when the pace of working-aged adults leaving the workforce is much faster than the pace at which folks are entering it, when median family income is lower today than it was at the worst part of the recession in 2009, and when annualized GDP decelerates from 2012 to 2013 to 2014, perhaps “group-think” commentators would benefit from visits to their local optometrists.

What’s really going on? Consumers are getting squeezed. Personal spending actually declined a seasonally adjusted 0.1% for the first time since January. Meanwhile, personal income rose the smallest amount in an entire year, just 0.2%. That is not going to do very much for helping out inflation-adjusted family income.

Of course, in a world where bad news may be good news, this type of data suggests that the Federal Reserve may not be able to end its zero percent overnight lending rate campaign in mid-2015, or at any point next year. It follows that those who love central bank stimulus – those with remarkably short memories – simply do not fear the removal of the beloved “punch bowl.”

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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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