When Recession Plays Rocket You Should Get Ready for Trouble


Do you know what one of the best-performing investments has been so far in 2016? Zero-coupon Treasury bonds.

The Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) has surged almost 14% in value since the start of the year, while the Vanguard Extended Duration Treasury ETF (EDV) has gained around 13.5%. Both ETFs invest in “zeros,” or bonds that feature no periodic interest etfspayments/coupons.

Because of that, they’re loaded with “duration risk,” or interest rate sensitivity.  Investors buy them only when they’re confident that: Economic growth is weak; Inflation risks are non-existent; and Interest rates will therefore remain low or fall, handing them significant capital gains.

But those aren’t the only “recession plays” that are rising in value. ETFs that invest in traditional Treasury notes and bonds are also handily beating stocks this year. The iShares 7-10 Year Treasury Bond ETF (IEF) was recently up around 5% year-to-date, more than double the 1.8% return on the SPDR S&P 500 ETF (SPY). And even within the stock market, recession-resistant stocks and sectors are far outpacing economically sensitive ones.

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stock analysiisTake a look at the Utilities Select Sector SPDR Fund (XLU), up 15.5% … the Consumer Staples Select Sector SPDR Fund (XLP), up 7.3% … or the iShares U.S. Telecommunications ETF (IYZ), up 7.1%. Those sectors are all considered defensive. That’s because people still have to turn the lights on, wash their clothes, make phone calls, and otherwise buy the products and services the underlying companies sell…even in a lousy economy.

Compare those year-to-date results to the results from the Powershares QQQ Trust (QQQ), down 5.1%, the Financial Select Sector SPDR Fund (XLF), down 2.3%, or the SPDR S&P Retail ETF (XRT), down 3.5%. Technology, financial, and retail firms are all much more closely tied to business and consumer spending.

Bottom line: Watching economic data is important when you’re trying to gauge the strength of the underlying economy. But watching investor behavior is important, too.

The underperformance of growth-sensitive sectors relative to recession-resistant ones speaks volumes about the market’s skeptical view about future growth and inflation. So does the strong run we’ve seen in long-term and high-duration bonds. Keep that in mind when determining how to invest your own money.

Want to know more about using indicators like these to build wealth? Then check out my course “How to Profit From Rising Interest Rates”.

Until next time,

Mike Larson

Mike Larson is a Senior Analyst for Weiss Research, and is also the creator of the course “How to Profit From Rising Interest Rates”. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.