As much as the architects of the U.S. stimulus might otherwise wish, it's becoming increasingly apparent that the U.S. economy won't be hot-rodding its way into a higher gear in the year's second half.
At best, the U.S. economy will chug along in low gear - managing only minimal overall growth, while bouncing over economic speed bumps that exist in more than a few key sectors. At worst, the engine of economic recovery will sputter, or stall completely - leaving Americans stranded alongside the fiscal roadside, or to roll backward into a double-dip recession.
[mm-toolbar]Most of the reasons underlying this assessment were clearly laid out in Money Morning's comprehensive Midyear Economic Forecast series article, "The U.S. Economy Is Headed for a Second-Half Slowdown." For our purposes, a brief summary of some of the recent statistical data will suffice, most notably:
So given all this "good news" heading into the second half of 2010 and beyond, what are investors supposed to do? How can you protect yourself - and even make more money - in a slowing economy?
There are actually three possible approaches, which you can use individually or in combination.
The first approach is to look beyond the overall economic situation, and focus instead on individual sectors and stocks that are either resistant to slowdowns or likely to grow in spite of (or because of) the deteriorating financial situation. Three stocks you might consider that fall into this category are:
The second approach investors can take when economic growth is slow - especially when interest rates are also in the cellar - is to forget about capital gains and focus instead on income. That means concentrating on high-dividend stocks - or, for really big yields, so-called master limited partnerships (MLPs). Since dividend stocks have been frequent Money Morning topics (see the May 29 article, "How to Fuel Your Retirement with Dividend Cash"), I'll just mention a couple of MLP prospects here:
The third - and most broadly defensive - approach is to purchase specialty exchange-traded funds (ETFs) that are designed to move in the opposite direction of a major market index. These so-called "inverse ETFs" use futures, options and other assets to create a passive portfolio that's expected to mirror the movements of leading indexes, but in the opposite direction. In other words, when the market falls, you profit.
The shares trade on stock exchanges, just like regular equities. Four of the leading inverse index ETFs are:
Finally, if you don't want to shake up your entire portfolio or spend hard-to-come-by cash on purely defensive measures, the one thing you should definitely do to ride out the economic slowdown - assuming it will be accompanied by a flat or mildly bearish market - is write "covered call" options on your existing stock positions.
With market volatility as severe as it has been in recent months, option premiums are very high, meaning you can frequently bring in an extra $200, $300 or more by selling a relatively short-term (two or three months to expiration) out-of-the-money call against every 100 shares of a stock you own (at least those priced at $10 a share or more). This brings in added income and provides a couple of dollars of extra price protection should the stock pull back in the near term.
The worst that can happen is the market will rally before the calls expire and you will have to sell your shares - at a price higher than you could get for them today. Not a bad "defensive" outcome - especially since you get to keep the premium you receive either way.
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