Two ETFs for Investors Not Surprised by the Weak Economic Data

Despite the raft of negative economic news we’ve been seeing over the last umpteen months, additional sour news that backs up the prevailing negative winds on Wall Street still manages to shock even the most seasoned of analysts.

According to an article headline published by Dow Jones Newswires, “U.S. Factories Show Surprising Contraction.” I’m not sure why the editors at Dow Jones Newswires would be surprised—disappointed, perhaps, but not surprised—but apparently, they are. (Source: “U.S. Factories Show Surprising Contraction,” NASDAQ web site, June 3, 2013.)

They are surprised, in spite of high unemployment, falling median incomes, an increasing number of Americans receiving food stamps, high personal and student loan debt, and stagnant wages. Even Wall Street seems a little tepid. Of the S&P 500 companies that have issued corporate earnings guidance for the second quarter of 2013, almost 80% have issued a negative outlook.

So I’m not sure why anyone would be surprised that U.S. factories showed a contraction.

The Institute for Supply Management (ISM) said its index of economic activity in the U.S. manufacturing sector contracted in May for the first time since November 2012, and only the second time since July of 2009. After flirting with the 50.0 level, the Purchasing Managers’ Index (PMI) fell to 49.0 in May from 50.7 in April. A reading below 50.0 indicates a contraction in the manufacturing sector and, usually, ebbs and flows in step with the health of the economy. (Source: “May 2013 Manufacturing ISM Report On Business,” Institute for Supply Management web site, June 3, 2013.)

And it’s not as if the United States is an economic island. China, the world’s second-largest economy, saw its manufacturing sector shrink for the first time in seven months. The HSBC China manufacturing PMI for May fell more than a full point month-over-month to 49.2 from 50.4 in April. (Source: “HSBC China Manufacturing PMI, Operating conditions deteriorate for first time since last October,” Markit Economics web site, June 3, 2013.)

Taken together, these two indicators suggest the world’s two largest economies are starting to react to what Wall Street has been telling us for the last two quarters—that it’s getting worse out there, not better.

The economic situation in the eurozone continues to be bad. Eurozone manufacturing contracted in May (48.3), its 22nd straight month of decline, though the silver-lining optimists note that the rate of decline eased for the first time in four months. This means that policymakers are finding solace in the fact that the downturn didn’t go from bad to worse—it just stayed at bad. (Source: “Markit Eurozone Manufacturing PMI – Eurozone manufacturing downturn weakest in 15 months in May,” Markit Economics web site, June 3, 2013.)

While the Dow Jones Industrial Average and S&P 500 continue to hold up against the negative economic indicators, many investors may be more than a little nervous, wondering if there is a correction in the works.

No matter whether the markets are going up or down, there’s an exchange-traded fund (ETF) for that.

During uncertain times, investors tend to cut back on smaller stocks and concentrate more on high-yield blue-chip stocks with a strong international footprint. This is especially true for consumer staple companies that manufacture personal care products, alcohol, tobacco, and food—products we aren’t willing to live without, no matter what happens.

The iShares S&P Global Consumer Staples (NYSEArca/KXI) ETF seeks returns that correspond generally to the price and yield performance of the S&P Global 1200 Consumer Staples Sector Index, and includes manufacturers and distributors of food, producers of non-durable household goods, and food and drug retailing companies.

For investors who think the markets are due for a correction, they can consider ETFs that short the different exchanges. The ProShares UltraShort Dow30 (NYSEArca/DXD) ETF seeks results that correspond to two-times the inverse (-2x) of the daily performance of the Dow Jones Industrial Average.

A charging bull market could, thanks to the economic disconnect, change directions at any moment due to any single factor, be it a natural disaster, interest rates, international financial crisis, war, and so on. For buy-and-hold investors comfortable with the many different varieties of ETFs, this opens up a world of growth opportunities.

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