Breakout

How to Invest With Economy Stuck in Neutral

Breakout

When the Commerce Department raised its second quarter GDP estimate by 50% late last month, you'd have thought news of the revision would have been heralded far and wide as an economic triumph in otherwise lackluster times.

And yet, the tweak to 2.5% from the 1.7% that was initially reported saw no cheers or shouts of joy since, the updated calculation still falls short of the kind of post-recession growth that investors have expected and sought for over the past four years.

Related: GDP Data Is Unreliable, Government Propaganda: Peter Schiff

"We're kind of stuck here in this two percent world," says Hank Smith, CIO at Haverford, in the attached video. "The way it's been for the past couple of years, is the way it's probably going to be for the next couple of years."

Of course, Smith's view conflicts with the Fed's current forecast that growth will accelerate to three percent next year. But this Pennsylvania-based investor says there are at least two reasons why the Fed's forecast is probably a bit too optimistic.

First, he says, is the fact that the U.S. consumer and the banking system are still both mired in a lengthy deleveraging process. While he points out that this is a decreasing headwind that gets a little weaker each year, it is still an obstacle to growth.

"We're probably about three-quarters of the way through the process," he says, admitting that he's confident the fabled U.S. consumer will eventually come roaring back once the economy and credit environment are more supportive.

Related: Walmart Earnings Disaster Exposes a Collapsing Economy: Davidowitz

The second reason Smith says we're "stubbornly stuck" in a two-percent growth rut is the ongoing drag of fiscal policy coming out of Washington, specifically from higher taxes and an increased regulatory environment. The good news here is that he expect at least another two or three years of low interest rates, amounting to monetary policy that is still "extraordinarily stimulative," and a partial offset to the not-so-helpful fiscal side of things. An additional factor that Smith did not mention that might warrant attention is the government sequester, resulting in less overall spending that also impacts the U.S. economy.

With this mindset and outlook, it is probably no surprise that Smith thinks defensive, non-cyclical sectors likes consumer staples (XLP) and health care (XLV) will be leaders since "their earnings aren't nearly as dependent on the direction of the economy."

More from Breakout:

Once Again, Washington Holds the Cards and Wall Street's Attention

Traders Struggle With Perfectly Terrible Jobs Number

Auto Sales Reveal a Recovery That’s Built to Last: AutoNation’s Jackson

Rates

View Comments (15)

Recommended for You

  • U.S. SEC to pay $30 million-plus in largest whistleblower award

    By Sarah N. Lynch WASHINGTON (Reuters) - An anonymous tipster living abroad will be receiving more than $30 million, in the largest whistleblower award ever doled out by U.S. The Securities and Exchange Commission said on Monday that the whistleblower provided crucial information that helped…

    Reuters
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • Wall Street Has A New Worry Now That The Economy Is Recovering

    Business Insider is at the annual Bloomberg Markets Most Influential Summit on Monday, and this year  guest after guest has talked about the same worry. Early in the conference Carlyle CEO William Conway, hedge fund legend Julian Robertson, and William Dudley CEO of the Federal Reserve Bank of New…

    Business Insider
  • Apple sells more than 10 million new iPhones in first three days

    Apple Inc said it sold more than 10 million iPhones in the first weekend after its new models went on sale on Friday, underscoring strong demand for phones with larger displays. Chief Executive Tim Cook said the company could have sold even more iPhone 6 and iPhone 6 Plus models if supplies had…

    Reuters
  • Gold crashes and is now tarnished for good

    Gold shined brightly at the beginning of 2014, with bullion prices jumping by about 13% from New Year’s Day until mid-March. Last week, the precious metal settled near lows not seen since Christmas 2013.

    MarketWatch
  • After big gains, stocks Cramer would avoid

    If you're looking at these stocks due to chatter of a super-cycle, Cramer thinks you'll come to regret it. Because sand is such an important part of fracking , a relatively new drilling process that's made formerly hard to reach deposits of oil (New York Mercantile Exchange: @CL.1) and natural gas…

    CNBC
  • Top Analyst Upgrades and Downgrades: Auxilium, BofA, Genworth, MGM, Walgreen, Wynn, Yahoo and More

    Auxilium Pharmaceuticals Inc. (AUXL) was downgraded to Hold from Buy at Stifel. Genworth Financial Inc. (GNW) was written up in Barron’s over the weekend as having 80% upside potential. Las Vegas Sands Corp. (LVS) was downgraded to Market Perform from Outperform and the price target was cut to a…

    24/7 Wall St.
  • Ruble Falls on Brent Decline, Fed Concerns: Russia Reality Check

    Markets are reacting in real time to tension in Ukraine following Russia’s March incursion into Crimea and subsequent annexation of the Black Sea peninsula. The Micex Index fell 1 percent to 1,417.46 at 12:44 p.m. in Moscow, giving a loss since Feb. 28, the day before President Vladimir Putin ’s…

    Bloomberg
  • Want a Career Change in Education? Earn your M.Ed.

    A Master of Education degree can help you launch a new career as a school administrator, curriculum director and more. Why wait? Apply to GCU!

    AdChoicesGrand Canyon UniversitySponsored
  • EMC Stock Soars After Investors Learn About Mega-Merger Talks With HP, Others

    For nearly a year, EMC and HP have been kicking the tires on a merger that would have created one the biggest enterprise tech companies on the planet — with over $130 billion in annual sales, according to the Wall Street Journal. Both companies were concerned they couldn't sell the deal as it was…

    Business Insider
  • Russian Industrial Giant Facing Bankruptcy?

    One of Russia's commodity producers could get crushed under the weight of its debt. U.S.-traded shares in the producer of coal, iron ore and steel, Mechel (MTL), fell 30%. The Market Vectors Russia ETF (RSX)  fell 1.83% today. The  iShares MSCI Russia

    Barrons.com
  • 5 401(k) Gotchas to Avoid

    Between employer contributions and the ability to defer income tax on your own contributions, 401(k) plans often help you come out ahead in retirement saving. Here are five 401(k) pitfalls to watch out for: [See: 10 401(k) Facts Everyone Should Know.]

    U.S.News & World Report LP
  • US cracks down on companies moving overseas

    The Obama administration cracked down Monday on certain overseas corporate mergers and acquisitions, aiming to curb American companies from shifting their ownership abroad to shirk paying U.S. New regulations from the Treasury Department will make these co-called corporate inversions less lucrative…

    Associated Press
  • Alibaba becomes world’s largest IPO, but stock dives

    It’s official: Alibaba is the world’s largest IPO. The title was pretty much in the bag on Friday, when the Chinese Internet juggernaut raised $21.8 billion in a blockbuster public debut, and was on its way to $25 billion after the New York Stock Exchange said the underwriting banks would sell…

    San Jose Mercury News
  • Linn Energy: No Surprise, Everyone Loves ExxonMobil Swap

    Last week, Linn Energy (LINE) arranged to swap some assets with ExxonMobil (XOM). On the heels of a positive take from Credit Suisse last week, two more analysts murmuring sweet nothings about the deal tdoay. RBC's John Ragozzino and team note that Linn's "portfolio high-grading strategy" continues…

    Barrons.com
  • What's Your Definition of Success?

    Success means different things for different people, that’s why we’ve started “The Success Project”.

    AdChoicesstrayerSponsored
  • The Debit Card Danger You're Probably Forgetting

    As the American economy sunk in the wake of the Great Recession, many Americans were forced to rethink their spending habits and tossed their credit cards overboard, reaching instead for the perceived safety of their debit cards. Debit cards protect you from yourself by limiting your spending to…

    U.S.News & World Report LP
  • SPIN METER: Those changing health law numbers

    Call it health care law numerology. The Obama administration has had to revise and refine some initial enrollment numbers for health insurance sign-ups after they turned out to be too optimistic. Parsing the numbers is a new pursuit for administration officials from President Barack Obama on down,…

    Associated Press
  • How to Play the Real-Estate Market

    Skimpy interest rates, pent-up demand and lower prices have sparked gains of about 20% in the median price of new and existing homes over the past two years. Select REIT Index—which covers a number of investment vehicles—has climbed about 150% since the beginning of 2009, roughly matching the…

    The Wall Street Journal
  • Blackstone to pull out of Russia

    US private equity group Blackstone is "giving up on Russia", highlighting how even well-connected western investors are shying away from doing business in the country. The New York-based buyout group has been frustrated in its attempts to find deals in the country since its co-founder Stephen…

    Financial Times
  • 25 Things To Know About Investing By Age 25

    Most of us are just in it to bulk up our savings for retirement, make a little extra money on the side, or even just beat inflation (more on that in a minute). ... but your retirement savings are. Retirement savings, on the other hand, are invested if you put them in a retirement fund like an IRA…

    Business Insider
  • Tax refunds will be cut for ACA recipients

    A significant benefit of the Affordable Care Act is the opportunity to receive money-saving tax credits up front to cut the overall cost of health insurance, but now hundreds of thousands of consumers could owe back some of that money next April.Those affected took advance payments of the premium…

    USA TODAY
  • With FlexPath, You Can Learn At Your Own Pace

    With Capella University's new self-paced FlexPath program, you can now earn a degree without sacrificing your schedule.

    AdChoicesCapella UniversitySponsored
  • Apple reports huge iPhone sales, Ebola drug maker pops, Sears slides

    Time for your "case of the Monday's" dose of Trending Tickers, the stocks you're watching as measured by Yahoo Finance ticker searches. Making the list today: Tekmira (TKMR) - The drug maker is up more than 11% on word that their Ebola treatment has

    Yahoo Finance