The stock markets have done remarkably well thus far this year with the S&P 500 index posting its best quarter since 1998, soaring more than 12 percent in the past three month, which can certainly be called an aberration supported by excess liquidity and artificially low interest rates.
The markets, however, witnessed a pull back this week, triggered by the FOMC minutes first. Later the ghosts of Europe returned to haunt investors as yields on Spanish debts jumped. The country struggled to sell medium-term notes on Wednesday and managed to raise €2.6 billion from the auction; closer to the bottom of its €2.5-€3.5 billion target.
The Spanish debt-problem has been attracting some attention and there has been an increased chatter over the Greek saga getting repeated again. The country needs to refinance debts worth €370 billion over the next three years, and sharp spending cuts announced by Prime Minister Mariano Rajoy has fuelled speculations of the country witnessing widespread social unrest.
However, some believe (I don’t) that Spain will not trigger a Greece-style crisis, and the markets have shown a knee-jerk reaction. Spain is EU’s fourth largest economy and a stricken Madrid can cause much bigger crisis than Athens. The currency union also seems much better prepared this time (allegedly).
The region’s rescue fund has already been strengthened to €720 billion while the European Central Bank President Mario Draghi has pumped in €1 trillion in the region’s banks to avoid a credit meltdown due to sovereign defaults. Spain is a somewhat more competitive economy than Greece and trimming the oversized public sector will help reign in government expenditure, however, that is not a good thing when unemployment is hovering at 23%.
It’s important that newly formulated Eurozone fiscal discipline rules and efforts to pass policies that encourage growth are implemented. Don’t be surprised if bigger rescue funds, albeit with a different name like Eurobond with joint liability to member states, is launched and the ECB launches multiple LTROs to keep borrowing costs under check.
The bottom-line is that there is a political will to battle the crisis collectively though it will be naïve to believe that the European crisis is over as fighting too much debt with more debt is simply an exercise in futility that will end badly.
The good news is that the domestic economy is looking much better with the housing market showing temporary signs of bottoming and the banking sector set to move to the next level after passing the Fed’s stress tests. Technology, Consumer Discretionary and Financials are the sectors that had stand-out performances between January and March. Here are some of the funds that have outperformed the indices by wide margins so far in 2012.
Financials:
Select Sector Financial SPDR ETF (XLF) is the largest financial ETF trading with $7.6 billion in assets. The fund has gained 21.5 percent over the first quarter of 2012 and has added about $300 million in new assets under management this year. The SPDR S&P Bank ETF (KBE) came in second with returns of about 20.3 percent during the same period and $400 million in new assets under management.
Consumer Discretionary:
International consumer discretionary stocks bettered US based auto companies. The Global X Auto ETF (VROM) gained an impressive 25.92 percent in the first three months of 2012, beating its peers comprehensively. The SPDR S&P International Consumer Discretionary Sector ETF (IPD) was the runner-up and 20.23 percent in the first quarter.
Technology:
The iShares Dow Jones US Technology Fund (IYW) has topped the chart for technology funds, adding 21.77 percent between Jan and March 2012. The Vanguard Information Technology (VGT) came in second, up 20.87 year-to-date. Both these ETFs have significant exposure in Apple.
I have no holdings in any of the ETFs mentioned, since my personal preference is to work with some of my featured Model ETF Portfolios, which may lag the major indexes at any given time, but offer far more balance when the downside comes into play again. That is not a guess but is a certainty, in my opinion; the timing of it is simply the unknown.
Being exposed to a Fed stimulated market environment via a balanced portfolio makes more sense to me, especially when that is combined with a clearly defined exit strategy designed to further limit downside risk.
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