What Should ETF Investors Do With A 'Wait-And-See' Fed?

Includes: HILO, PHB, PZA, YMLP
by: Gary Gordon

Virtually everyone acknowledges that Federal Reserve monetary policy (e.g., 0%-0.25% rate, QE 1, QE II, “Operation Twist,” etc.) has been extremely kind to stocks since early 2009. Yet, bulls and bears debate the impact of Fed policy going forward.

For example, many bulls believe that stocks will continue to excel due to the Fed’s promise to keep rates at exceptionally low levels through 2014. Bulls have faith in a basic Bernanke chain of events – that low rates spur business refinancing which leads to better balance sheets which leads to more hiring which leads to greater consumer confidence/spending. And those positive economic outcomes should, in turn, bolster stock prices.

On the flip side, bears see a version of the law of diminishing returns. Each round of Fed intervention may have been less effective than a prior easing action. What’s more, the Fed has been hinting that it may be on hold until and unless the economy tanks. It may follow that decelerating economic activity, a slowdown in corporate profits and a stuck-on-8% unemployment picture might contribute to a downtrend for stocks.

Perhaps ironically, I don’t believe that either side has it correct. If the economy picks up strength, and/or if corporate profitability exceeds expectations, the market may grind a bit higher. However, it will likely stall because the Fed would refrain from additional intervention. Or, if the economy sputters, the market may begin yet another course of corrective activity. Then, central banks from China to Japan to the U.K. to the U.S. to the EU will take action, and stocks would rally back.

Essentially, don’t expect the markets to soar with decelerating corporate profits and an increasingly uncertain geopolitical environ. By the same token, a determined community of central banks as well as a flood of buyers needing to make up for months (even years) of lost opportunity would be able to overcome bearish objections.

This is why I continue to press my income production thesis. Absent a systemic financial collapse, taxable account investors in high tax brackets could easily produce 6%-plus in PowerShares Insured National Muni (NYSEARCA:PZA). Moreover, Powershares High Yield Corporate (NYSEARCA:PHB) is sufficiently diversified to get you 7%-plus in your tax-deferred account ... and you aren’t likely to break much of a sweat.

It may sound like I am less spirited about stocks and riskier assets. However, it would be more accurate to say that I am less focused on price appreciation. Where EG Shares Emerging Market Low Volatility (NYSEARCA:HILO) may be able to get you 6% from a focus on staples and infrastructure companies, the unhedged asset’s ping pong action is less of a concern to me. Similarly, uneven demand for oil and natural gas may cause some difficulty for energy pipeline partnerships, yet the prospect of 8.5% from Yorkville High Income MLP (NYSEARCA:YMLP) is an attractive buffer against vacillating prices.

Expect the spring and the summer to be choppy. Hedge against price declines or employ stop-limit loss orders. Yet don’t view confusing data as red or green signals. Rather, acknowledge that if Bernanke’s Fed is going to play “wait-n-see,” you can play the same game while simultaneously generating cash flow.

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 web site. ETF Expert content is created independently of any advertising relationships.