The U.S. market has dug itself out of the financial depression of 2008, but stocks and exchange traded funds will likely continue to experience slower growth in the coming years as a number of factors still weigh on an economic expansion, according to iShares analysts.
"Going forward, economic growth is unlikely to accelerate in a meaningful way," Russ Koesterich, Managing Director, iShares Chief Investment Strategist, wrote in a research note. "The consumer deleveraging has played a significant role, but other factors are also contributing: a stubbornly high underemployment rate, an aging workforce, an elevated and growing national debt and lackluster productivity."
Koesterich predicts the U.S. economy will expand 2% or a bit less for the next few years.
Americans have too much debt relative to their income and wealth. The current ratio of household net worth to debt is about 4.8 to 1, compared to the long-term average of 7 to 1. This poses a significant problem considering that consumption accounts for 70% of U.S. GDP.
Weak real income growth of between +1% and -1% year-over-year since 2009 as a result of the poor recovery in the U.S. labor market has contributed to a slower economic expansion. Even if the jobs market recovers, the slowing wage growth has been a standing trend before the financial crisis.
Since 2000, the labor force has been incrementally decreasing from a peak of 67% to 63.6%, around a 31-year low, which is partly due to the retiring workforce from the Baby Boom generation.
Consequently, the iShares analyst suggests investors should construct portfolios with a prolonged period of slow growth in mind.
"In particular, we see good opportunities in U.S. mega capitalization stocks (mega caps), which remain cheap and are levered to international growth opportunities," Koesterich said in the note. "Conversely, investors should treat small capitalization stocks (small caps) cautiously and avoid overpaying for this style."
Some mega-cap ETFs include:
- SPDR Dow Jones Industrial Average (DIA)
- iShares S&P 100 Index Fund (OEF)
- Guggenheim Russell Top 50 ETF (XLG)
- Vanguard Mega Cap 300 ETF (MGC)
Investors who want to take an aggressive stance against small-cap stocks can hedge with inverse small-cap ETFs:
Max Chen contributed to this article.
Additional disclosure: Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates.