What Economic Indicators Should Investors Watch?

We speak with Simeon Hyman, Global Investment Strategist at ProShares, on how investors can better position their portfolio in the current environment, and which economic indicator may be able to show whether there’s a good chance the economy can make a soft landing.

What should investors expect from high inflation and rate hikes?  

As the cliché goes, the solution to high prices is high prices. And there are already some signs that inflation may have peaked. That is not to say that inflation will return to the Fed’s long-term target of 2% overnight—but the worst may be over.

While inflation may have peaked, interest rates may have further to go. It’s nearly a lock that there will be more Fed rate hikes at least through the end of 2022. In addition, an equally important but overlooked Fed action is Quantitative Tightening. The Fed is shrinking its balance sheet—and at twice the speed as last time.  

In 2017, Quantitative Tightening drove ten-year bond yields up well over 100 basis points. Quantitative Tightening removes the artificial suppression of longer-term interest rates. That’s why they may rise even if inflation recedes.

How should investors position their portfolios in the current rising-rate environment?

Bonds are largely defenseless when interest rates rise—yields go up, prices go down. Stocks are not—earnings can grow. It makes sense to hate stocks less than bonds these days. In other words, it makes sense to be overweight stocks.  

There is also an opportunity to lean into rising rates within one’s stock portfolio. The Nasdaq U.S. Large Cap Equities for Rising Rates Index—which our ETF EQRRfollows—consists of the sectors and stocks within them that have demonstrated the highest correlation with rising ten-year Treasury yields. The index has delivered roughly triple the return of the S&P 500 since rates began to rise in the summer of 2020.  

For those looking for confirmation in the fundamentals, the index delivered triple the sales and earnings growth of the S&P 500 in the Q1 2022 earnings season.

  

How are you evaluating cryptocurrency and other alternate investment vehicles during this time?

Last fall, ProShares launched BITO, the first bitcoin-linked ETF in the United States. While bitcoin is likely to remain volatile, as “digital gold,” bitcoin deserves a look for inclusion in a well-diversified portfolio, particularly in an inflationary environment.  

Infrastructure is a potentially inflation-resistant equity segment that makes a lot of sense these days. We have an ETF, TOLZ, that focuses on companies that own infrastructure assets—toll-takers. Pricing power and more stable demand may make these infrastructure owners a better choice these days than the more economically sensitive companies that build infrastructure. 

Are there any economic indicators that investors should pay close attention to during this period?

Keep an eye on wage growth. Wages are the stickiest element of inflation. If wage pressure is contained, there’s a good chance the economy can make a soft landing.  

Here are a couple of reasons to tilt optimistically on this point. First, unions represent a substantially smaller portion of the workforce than they did in the 1970s, so systemic, contractual wage increases are not as widespread.  

Second, there are likely still a fair number of underemployed workers. They may need training, which might not happen overnight, but workers in the gig economy moving up the ladder could help keep a lid on wage inflation.

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IMPORTANT INFORMATION 

This is not intended to be . Investing involves risk, including the possible loss of principal. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results. There is no guarantee any ProShares ETF will achieve its investment objective.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. Whether or not actual results and developments will conform to ProShare Advisors LLC’s expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments. 

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ProShares ETFs are distributed by SEI Investments Distribution Co., which is not affiliated with the funds' advisor or sponsor.

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

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