By Kevin Grewal, Editorial Director at www.SmartStops.net
For most investors, the typical rules of investing have been thrown out the door as equity markets witnessed the worst financial and economic crisis in over 70 years. After watching their portfolios diminish, most were dumbfounded by the equity markets when they surged nearly 50% above their March 9 lows. So what lies ahead for the future? It is hard to tell, but there are some positive indicators that the economy is recovering and the equity markets are appealing.
Most recently, the ADP Employer Services Report suggested that things are starting to ease on the unemployment front as the private sector shed 298,000 jobs in August, a drastic improvement from the 370,000 shed in July. Additionally, the Labor Department stated that productivity rose at an annual rate of 6.6% in the second quarter of 2009, marking the largest advance in the last six years. This is important to the overall health of the economy because higher productivity generally results in the ability to sustain or even improve living conditions.
The third positive economic indicator came from a report that indicated factory orders rose in July. Many companies implemented lean measures to bolster profits, which included trimming inventories. In an attempt to prevent stockpiles from further depleting, companies are replenishing inventories. This is a good sign because inventories are traditionally the leader in an economic recovery and the build-up, or replenishment of stockpiles means that a recovery is on the horizon.
Lastly, there have been plenty of indicators that the real estate market is on the mend. The most recent came from the National Association of Realtors, who stated that its seasonally adjusted index of sales contracts for previously occupied homes signed in July rose 3.2% to its highest level in the past two years.
Some sectors will benefit more from these economic indicators than others. For example, consumer staples will benefit from the increase in purchasing power and improvements in unemployment as consumers will continue to purchase essentials. The SPDR Consumer Staples Select Sector ETF (NYSEARCA:XLP), which is up 27% from its March 9 low of $19.41 to close at $24.59 on Tuesday, will likely continue to reap these benefits.
A second sector that usually sees life with a recovering economy is energy. The iShares S&P Global Energy (NYSEARCA:IXC), which is up 37% from its March low of $23.11 to a Tuesday close of $31.70, should continue to benefit not only from a U.S. recovery, but a global recovery and the strength building of emerging markets.
Lastly, base metals should reap some benefits as manufacturing improves and factory orders rise. A good diversified way to grab exposure to these metals is through the PowerShares DB Base Metals (NYSEARCA:DBB), which closed at $17.86 on Tuesday, up 63% from its February low of $10.95.
Although these mentioned indicators suggest equities are attractive, one must keep in mind the inherent risks involved when investing in them. A good way to mitigate these risks is through the implementation of an exit strategy. According to the latest data from www.SmartStops.net, the uptrend in the previously mentioned ETFs could potential come to an end at the following price levels: XLP at $24.25; IXC at $31.00; DBB at $16.85. These price levels fluctuate and change on a daily basis and updated data can be accessed at www.SmartStops.net.
Written By Kevin Grewal in Laguna Niguel, Calif.