Five days cannot tell you much about the future direction of market-based securities or their respective asset classes. They may, however, be able to provide insight into the more pressing issues or lingering worries on the minds of investors.
For example, many folks believe that Europe’s sovereign debt crisis effectively ended in 2011 when the head of the European Central Bank declared it would do “whatever it takes” to preserve the euro. Yet, the four worst borrowing-’n’-spending offenders in the eurozone — Portugal, Italy, Greece and Spain — chalked up the poorest five-day performances of any unleveraged vehicles in the entire ETF universe. Perhaps the “PIGS” problem still has a way to go before reaching a resolution.
In truth, not everyone concurs that peripheral countries in Europe are going to face debt scrutiny once again. Heck, Argentina has technically defaulted on its sovereign bonds, while stocks in the Global X FTSE Argentina 20 ETF (ARGT) have fared better than the ETFs for Portugal, Italy, Greece or Spain.
Does the selling have to do more with the Russia-Ukraine conflict, then? That may be an easy target, but my sense is that deflation and headline bank bailouts are reigniting old doubts about the euro-zone’s ability to put recession in the rear-view mirror.
Last Week’s Best Performing ETFs
Now, let’s shift to five of the best performing ETFs (unleveraged) over the prior trading week. Those that produced positive returns come from outside of the stock world.
The easiest analysis would explain away the gains as a function of recent geopolitical tensions — Ukraine, Gaza and now Iraq. However, that would fail to account for the reality that long bonds in ETFs like Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) and Vanguard Extended Duration ETF (EDV), which have been atop the leader-board from the very first day of 2014. Perceived safe haven currencies like the CurrencyShares Japanese Yen Trust (FXY) and perceived safer-haven commodities like gold have also been winning since the initial trading session of this year.
Only the singular food commodity, Teucrium Wheat Fund (WEAT), can be dismissed as a five-day oddity.
So, what is really happening, then?
There is a slow leak in the front tire of the economic tricycle – a slow leak in the expansion of credit. Businesses and, to a lesser extent, consumers have been chowing down on easy money. However, the U.S. Federal Reserve is looking to make it a bit more challenging to borrow and spend. In a healthy economy, that might not be such a big deal. But if credit growth wanes, where will additional economic growth emanate from?
Surely not from median family income because inflation-adjusted wages are in the same place that they were back in 2009. Nor will growth come from employees in the workforce as the percentage of the working-aged adult population remains near its lowest levels in nearly 40 years.
In essence, if the U.S. economy does not get its credit growth, it’s unlikely to see its gross domestic product break out in a sustainable way. That spooks stocks; it sends investors flocking to “risk-off” assets.