The US economy is still struggling through recovery from the 2008 credit crunch. The Fed’s policies have been to put the US economy back on track and speed economic growth. Recent economic indicators show a still weak growth for the US economy. The unemployment rate has been on the surge since the beginning of this year after slowing down to 9.0 % (Jan 2011) from 9.7 % (Jan 2010). The inflation rate has been relatively high the previous two years (2009 & 2010) and reaches a current 3.8% for August 2011. Other economic indicators show similar trends.
Obama’s job act was a recent attempt by Government to boost the US economy and get Americans back to work. The President’s economic plan proposes a $447 Billion in tax cuts and government spending. The plan estimates total cost of $175 Billion for income tax cuts from 6.2% to 3.1% for workers in 2012, total cost of $70 Billion for income tax cuts from 6.2% to 3.1% for employers, total cost of $140 Billion for infrastructure investments, and $62 Billion for unemployment insurance and new jobless programs.
On Monday, Obama announced a plan to cut the nation’s budget deficit by $3.6 trillion over 10 years through tax increases, including a special tax on the rich labeled “Buffett Rule” aimed at letting millionaires pay extra tax above those paid by middle-class Americans. This will downsize the US economy in the long term.
The Fed on Wednesday released its statement on the FOMC meeting outcome, announcing that it would purchase $400 Billion long term treasury bonds to replace its short term treasury bonds by the same amount, confirming market expectations on the Fed’s policy strategy known as “Operation Twist”. Operation Twist is a strategy to push long-term interest rates further down by purchasing longer duration bonds. The Fed took a step further to announce that it would reinvest the proceeds from its maturing mortgage securities back to the mortgage market. The Fed’s outlook on the US economy is gloomy. This news hit the markets with new concerns about the Europe debt crisis. The global financial markets all took a down hit after the Fed’s statement. The US stock markets reacted badly to the Fed’s announcement as Thursday’s trade day is down with Dow Jones, S&P 500, Nasdaq, and commodities prices. A similar trend is observed for the European and Asia stock markets.
Stocks that do well when markets are weak are those that have low correlation with the market index. Stocks within sectors such as consumer staples, healthcare and utilities are suitable candidates for short-term trading. Picking up these sector-based ETFs that make up the S&P 500 is the best strategy in beating the S&P 500 index.
For instance, at the close of the market on Tuesday, though the S&P registered a negative performance, the only S&P sectors gainers were XLP (+0.20%), XLV (+0.92%), and XLU (+1.45%). These sector based funds are resistance funds that perform well when overall market performance is bad.
Consumer Staples Select Sector SPDR Fund (XLP) holds 41 securities and has respective correlation of 0.71 with the S&P 500 and 0.73 with the DJIA. Its beta to the S&P 500 is 0.59. Beta measures the asset return’s volatility to the market index.
Health Care Select Sector SPDR Fund (XLV) holds 52 securities and has respective correlation of 0.82 with the S&P 500 and 0.86 with the DJIA. Its beta to the S&P 500 is 0.81.
Utilities Select Sector SPDR Fund (XLU) holds 33 securities and has respective 0.42 with the S&P 500 and 0.50 with the DJIA. Its beta to the S&P 500 is 0.63.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.