U.S. stock investors have largely dismissed several market-moving forces from the previous decade. "Decoupling," rising interest rates, the yen carry trade -- many of the most powerful forces in the financial universe have been less relevant because the Federal Reserve is purchasing $85 billion in government and quasi-government bonds.
More recently, however, the uncertainties of yesteryear are nipping at the backsides of formerly undeterred bulls. Today, there appears to be acknowledgement that U.S. stocks cannot decouple from foreign stock assets indefinitely. Whereas U.S. stock participants had not been fazed by Europe's recession nor the underperformance of emerging market equities, the recent deterioration of foreign stock shares is beginning to weigh on U.S. stocks. Similarly, there seems to be recognition that if the Fed does slow its bond-buying endeavors, interest rates are likely to rise. Indeed, Fed tapering chatter sent interest rates significantly higher, causing rate-sensitive assets across the income-producing spectrum to plummet.
Even more recently, Japan's unprecedented amount of quantitative easing initially created Japanese stock euphoria. The yen lost roughly 20% of its value, helping the export-dependent economy rebound in the immediate term. Unfortunately, for the world at large, those who sold yen to finance higher-yielding and faster-appreciating assets elsewhere are currently caught in a bind. Pressure has mounted to reverse the so-called "yen carry trade" such that U.S. stocks are sold to buy back the yen. In other words, carry trade fears are back.
It follows that there are three ETFs that can help an investor determine whether to increase or decrease exposure to U.S. stocks. They include:
1. iShares All-World Excl. U.S. (ACWX). At the time of this writing, U.S. stocks via the S&P 500 are up 14% year to date. Non-U.S. equities via ACWX? A mere 2%. The decoupling looks even worse when you investigate emerging markets via Vanguard Emerging Markets (VWO). The emergers are actually off 10% -- a 2,400-basis-point discrepancy with the U.S. markets. (See also "Asset Class Diversification May Cause Portfolio Abuse.")
Nevertheless, ACWX should serve as a premier tracking tool. Its current price rests between its 50-day and 200-day, and may have strong support at its 200-day moving average. If ACWX were to break below and hold below its 200-day, long-term trendline, U.S. stocks would have a tough time with being a lone ranger in equity land.
2. CurrencyShares Japanese Yen Trust (FXY). The greenback is the world's reserve currency. That said, the impact of a volatile yen cannot be underestimated. When the yen is falling, many are inclined to buy stocks and higher-yielding investments. Dramatic spikes in the yen, however, lead others to sell first and ask questions another day.
The dramatic decline in the yen since November 2012 has boosted demand for U.S. stocks and U.S. high-yielders. The mid-May turnaround, however, has resulted in FXY climbing above its 50-day moving average. If FXY gathers more steam and reaches its 200-day, U.S. stocks are likely to suffer an increase in selling pressure.
3. iShares Barclays 7-10 Year Treasury (IEF). This exchange-traded indicator may be the granddaddy of them all. For an entire year, IEF had tested lows of 105, always recovering and always sending yields lower. In the last few weeks, IEF broke through 105 on the downside; this corresponded to the highest 10-year yields that traders can recall seeing in the last 12 months.
Ben Bernanke speaks to Congress on June 19. If the markets via IEF interpret his comments as dovish, the brief blip below 105 may be forgotten. By contrast, if IEF interprets the chairman's commentary as hawkish, the 10-year yield could spike above 2.25% and send IEF to fresh 52-week lows. Such an event would likely cause investors to sell stocks in a hurry.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships.