Stock ETFs Have More Room to Run in Low Inflationary Environment

ETF Trends

The strengthening broad market moves have pushed U.S. equities to record heights, and the rally in stocks and exchange traded funds may still have legs.

Year-to-date, the SPDR Dow Jones Industrial Average ETF (DIA) is up 2.0%, SPDR S&P 500 (SPY) rose 5.3% and PowerShares QQQ (QQQ) increased 5.3%.

The S&P 500 index recently broke above 1,950 for the first time, and market observers believe the stars are still aligned.

Along with positive factors like the improving economic outlook, dropping unemployment rate and other improved data, analysts are pointing out that the broader stock market still looks appealing, given the low inflationary environment, reports Michael Mackenzie for Financial Times.

Scott Minerd, global chief investment officer at Guggenheim Partners, noted that during past periods when inflation was hovering below 2% have been accompanied by an average price-to-earnings ratio of 19.6, compared to the current P/E of 17. Moreover, the S&P has rallied some 20% during previous years before rate hikes begin.

The personal consumption expenditure price index stood at 1.6% in April ear-over-year, below the Federal Reserve’s 2% inflation target, the Wall Street Journal reports. The government also revealed that U.S. Producer Price Index fell 0.2% in May month-over-month and was up 2% year-over-year.

Consequently, some market observers argue that equity prices will continue to rally in the coming months, led by large multinationals with Eurozone exposure that will benefit from the European Central Bank’s easing policies.

Along with DIA, ETF investors can gain exposure to mega-capitalization stocks through fund options like the iShares S&P 100 ETF (OEF) or Vanguard Mega Cap ETF (MGC) . OEF is up 3.8% year-to-date while MGC rose 5.3%.

However, there are still some potential pitfalls. Specifically, rising oil prices could cut back on consumer spending. The United States Oil Fund (USO) is up 10.7% year-to-date, with WTI crude oil prices jumping to $106.7 per barrel on the escalating violence in Iraq. [Chart of the Day: Unloved Oil]

Additionally, a quickly depreciating euro could also weigh on multinational’s revenue out of the Eurozone when converted back to the USD. The CurrencyShares Euro Currency Trust (FXE) has dipped 1.6% year-to-date. [Investors Piled Into These ETFs Ahead of ECB Meeting]

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Max Chen contributed to this article.

For full disclosure: Tom Lydon’s clients own shares of SPY and QQQ.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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