This has been a crazy week that included the Greek debt crisis, the Chinese Stock Market meltdown and the New York Stock Exchange ‘HALT’. The markets have been volatile but the ups and downs have been smoothed out by owning both stocks and US Treasury bonds (for me via ETFs). Generally speaking, that has helped me navigate through the storms this week with minimal impact.
Looking back, the second quarter has been one of the toughest I’ve faced in several years. I’ve written extensively about the unusual volatility in Treasury Bonds, but the stock market has also been struggling. As of yesterday’s close, the S&P 500 (SPX – quote) was once again negative for the year and so was the Dow Jones Industrial Average. The technology heavy NASDAQ Composite is still positive for the year.
Many investors were likely concerned when they heard about the NYSE trading halt—and it was definitely extraordinary (and troubling) that it happened. We may never know the true cause. Nowadays, though, much of the trading done by custodians isn’t done on the NYSE so I still had the ability to execute trades.
So…with all this uncertainty, what did I do this week?
First let’s talk about my ETF positions in treasury bonds. The Vanguard Extended Duration ETF (EDV) and the 20+ Year Treasury Bonds ETF (TLT) gained around 4 to 5 percent earlier this week (before tapering off). I have been waiting for them to recover so I can reduce the size of my EDV positions. EDV is the more volatile of these two treasury bond ETFs so I used the early week gains to trim that position. I continue to hold my TLT position because I remain firmly convinced that the Federal Reserve will NOT raise interest rates this year and that treasury bonds (i.e. ETFs like TLT and EDV) have greater potential return than stocks right now on a risk adjusted basis.
Our economy continues to struggle. China is facing very real and significant struggles amidst an economy that is quickly slowing. And the Greek crisis is going to result in slowing growth in Europe and a lower Euro currency. That will have the impact of again importing deflation to the US. As that happens, our economy will continue to remain sluggish and may slow even further. Keep in mind that a Fed rate hike would exacerbate the problems in Europe, Greece and China—which is why the IMF has been unusually vocal in saying that the Fed should hold off on any hike.
Generally, stocks do not do well in a slowing economy. That’s why I have been increasing my cash position, and focusing stock holdings on the technology, healthcare and consumer sectors—ones that should do well even in a slow economy.
Twitter: @JeffVoudrie
The author holds positions in mentioned securities such as TLT and EDV at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
