How to Invest for Income When Interest Rates are Low


It's clear that the economy is recovering at a much slower pace than previously thought. A few key sectors of the economy are preventing a quick recovery. The first, and probably the most important, is the labor market. In Ben Bernanke's late August update on the state of the US economy he had this to say about the labor market:

" Incoming data on the labor market have remained disappointing. Private-sector employment has grown only sluggishly".

A recent report from the Labor Department stated that the private sector added 67,000 jobs in August, up from the 40,000 economists had previously estimated.

Although this seems like good news, the number was more than offset by the loss of 121,000 government jobs in the same month. In all, the U.S. lost around 54,000 jobs in August. The US hired a large amount of Census workers, which only helped the labor market for a short period of time.

Private-sector hiring is essential to drive the unemployment rate lower, but this increase in private-sector jobs is being offset by the large number of people leaving the labor force.

If this continues for an extended period of time, some experts believe that the unemployment rate will creep up to 10 percent and stabilize at that level. The problem is that the pace of hiring is extremely slow. Until private hiring accelerates to an appropriate level, consumer spending and lending will remain at depressed levels and could hamper the economic recovery.

The Fed is aware of the problem and may have to supply additional monetary stimulus when needed. Its actions in coming months should be a key indicator of how fast the economy is recovering.

***The second biggest factor affecting the recovery is the structural problem within the small business sector. According to the experts, small business share of GDP remained constant around 50 percent of GDP from 1998 to 2004.

With this much weight on this single sector alone, a sustained recovery is unlikely until small businesses are able to grow at faster rates.

Not only will small businesses contribute directly to overall growth, but the strengthening of this sector will lead to increased hiring, which should in tern lead to increased spending into other areas of the economy. Bottom line - a healthy recovery is unlikely without a strengthening and more active role by small businesses.

To find the best small companies that can lead the economic recovery I like small cap tech. To find my best picks in this sector, click here.

***Lastly, an improvement in the US housing market is needed for a more sustained recovery in the economy. In the Fed's meeting in late August, Bernanke said, " Home sales dropped sharply following the recent expiration of the homebuyers' tax credit. Going forward, improved affordability--the result of lower house prices and record-low mortgage rates--should boost the demand for housing".

Remember, around 1 in 10 people are without a job and about 2 in 10 are worried about losing their current job. With such great uncertainty right now, I can see the housing market recovering at a slow pace for quite some time.

The Fed can only encourage so much expansion and lending. But in the end, I think it's going to take some time for all the pieces of the puzzle to fit together until we have strong and steady growth.

Now what does this mean for you and your future investments?

Pay close attention to economic data and/or any decision the Fed makes, as these decisions will continuously indicate the strength of the economy. Remember, the economy is recovering - but at an extremely slow pace.

One potential investment opportunity for when interest rates are at an all-time low and the economy is in early stages of a recovery are Real Estate Investment Trusts (REITs).

The chart below shows the performance of the Vanguard REIT Index ETF ( VNQ ) versus the S&P 500. Year-to-date, the REIT index has returned 20 percent while the S&P 500 has had a negative return of 4 percent.

Now you can invest in an index, but I prefer stocks. One small-cap play is Developers Diversified Realty C ( DDR ) , which owns and leases shopping centers and malls and operates as an REIT in the US.

The company has a market cap of $2.9 billion and is up 24 percent year-to-date. With interest rates at record lows and the economy on the path to recovery, I like this company and REITs over the next few quarters. They are risky however as cash flows are not of the highest quality right now. As always, I encourage you to do your own homework on any stock you're considering.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks

Referenced Stocks: DDR , VNQ

Wyatt Investment Research

Wyatt Investment Research

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