A string of bad economic reports, including further declines in home prices and May's disappointing jobs report, have raised concerns that the U.S. economy is in the midst of a slowdown, which many economists are referring to as a "soft patch." The question now seems to be whether this will be a prolonged period of weakness, or just a bump in the road.
"The economy is still moving forward, but it's moving forward at a slow pace," says Russ Koesterich, chief global investment strategist at iShares. "And there are a number of headwinds that may linger for awhile."
The Dow Jones Industrial Average has declined for six consecutive weeks, the first time that's happened since 2002. And May marked the first month since December 2010 that stock mutual funds experienced net outflows, according to research firm Strategic Insight.
Such changing economic developments have implications for your investments. Here are six strategies for positioning your portfolio in today's slow-growth economy:
Get defensive. Conventional investing wisdom says to play defense when stocks tumble. Stocks of companies in sectors like consumer staples, healthcare, and utilities are generally considered "defensive." That's because these companies' revenues aren't tied to economic fluctuations, and the goods and services they sell are considered essential to consumers. Brian Gendreau, market strategist with Financial Network, a California-based financial advisory firm, says investors generally flock to defensive stocks during economic slowdowns rather than investing in cyclical stocks in sectors like technology and consumer discretionary. Typically, cyclical stocks don't perform as well during periods of slow growth because consumers cut back on non-essential items. A 2009 MSCI Barra survey found that from 1976 through 2009, during periods of contracting business cycles, defensive stocks in the MSCI USA Index returned an annualized 7 percent, while cyclical stocks lost an annualized 4 percent. The top three defensive sectors—consumer staples, healthcare, and utilities—returned an annualized 10 percent over the same period of time.
Be wary of treasury yields. Treasuries have rallied recently. After the 10-year treasury reached a yield of nearly 3.8 percent earlier this year, it has steadily fallen to below 3 percent as of June 15. Experts say investors are seeking safety in treasuries because they're concerned about Greece's debt woes and the economic slowdown in the United States. Long-term investors may not want to bet on treasuries right now, experts say. Historically, treasuries have traded about 2 to 3 percent above the inflation rate, Koesterich says. But today, the 10-year treasury yield is trading below the inflation rate. "While I don't think inflation is a risk in 2011 and probably not even 2012, you do want to worry about purchasing power over the long term," he says.
Think big. Instead of locking in a low yield with treasuries, Koesterich says investors should consider "mega-cap" stocks, the largest U.S. stocks, which are included in the S&P 100. "They're very levered to international growth," he says, meaning they allow investors to take advantage of growth in other countries that are not experiencing as much of a slowdown as the United States. "Most of these companies will have some ability to raise prices if inflation starts to rise, so it's more likely to protect your purchasing power than buying a treasury with a 3 percent coupon," he says. Even bond guru Bill Gross, who manages the world's largest bond fund, PIMCO Total Return (PTTAX), has urged investors to consider buying dividend-paying stocks like Coca-Cola, Proctor & Gamble, and Johnson & Johnson.
Buy the unloved. At times, different sectors of the stock market are shunned by investors because they're perceived to be out of favor. That can present investing opportunities, says Rob Stein, senior managing director of Chicago-based Astor Asset Management. He's currently bullish on the financial services sector, which he says has been unfairly beaten down over concerns about regulation. "Jump into the fire," he advises investors. Stein invests in exchange-traded funds like Financial Select Sector SPDR (symbol XLF), which provides exposure to big banks like JPMorgan Chase and Goldman Sachs, as well as insurance companies like Prudential and Aflac. Year-to-date, the ETF is down almost 4 percent. The S&P 500, by comparison, has returned about 1 percent.