ETF Review and Outlook for DIA, SPY and QQQ
A review of the top index funds paves the way for a coherent approach
to forecasting and investing in the stock market. From a pragmatic
stance, the choice vehicles lie in the exchange traded funds for the
leading benchmarks of the bourse. The latter consist of the Dow Jones
Industrial Average, the S&P 500 index, and the Nasdaq 100
yardstick. For these stalwarts, the tracking funds take the form of
DIA, SPY and QQQ respectively.
Within the tangible economy, the conditions have not changed a great
deal since the Great Recession. On the downside, the politicians of
the West went out of their way to solidify the distortions in the
housing sector that emerged en route to the financial crisis of 2008.
A showcase of bungling involved trillions of dollars in bailouts for
gutted banks that had succumbed to their own reckless schemes. In
this way, the pols kept alive some of the biggest and most
unproductive firms in the economy.
The struts put in place also prevented the property sector from
shedding the mountain of blubber it had built up during the housing
bubble that led to the financial fiasco. Given the enormity of the
shackles imposed, the economy as a whole was consigned to wheeze and
limp at least until the 2020s.
In this shaky environment, the prospects for the industrial nations
are lackluster at best. A glaring example lies in Europe which
continues to wallow in the doldrums. Given the torpor of the
senescent regions, the emerging markets of the world are fated to
slog ahead mostly on their own power.
Luckily for investors, though, several factors have softened the
blows dished out by the politicos. One tonic lies in the bloom of the
world economy, along with the swell of profits for global firms
ranging from Apple and Boeing to Google and Visa. Another boost comes
from the revamp of the U.S. tax code in 2017 along with the surge of
corporate earnings to follow.
Better yet, vanguard firms make deft use of digital technologies
ranging from online platforms to smart agents. The crank-up of
productivity by the spearheads has enabled the stock market to fare
much better than the real economy. Moreover the tailwinds have plenty
of room to run over the years and decades to come.
On a cautionary note, though, the upswell of the bourse during the
late 2010s and afterward will lure a growing number of punters out of
the woodwork. As a result the market will get ahead of itself from
time to time. The DIA fund, for example, will continue to slump by a
handful of percent every few years as well as slam into full-fledged
crashes a couple of times per decade. On the bright side, the
crackups will deter the general public from stampeding the bourse
during the 2020s. In that case, a full-blown bubble will not arise
until the subsequent decade.
On the whole, the turning points for the top benchmarks occur around
the same time. Despite the linkage, though, every index dances to its
own tune tempered by a host of historical landmarks, psychic drivers,
and market forces. To cite an offbeat example, the investing public
faced a mental hurdle lying at 20,000 points for the Dow index; but
the benchmark trotted past the milestone in 2017 with only a brief
pause due to the ebullience of the madding crowd at the time.
As a rule, the junior members of the bourse surge when the senior
ranks trudge higher. Examples of springy groups lie in bantam firms
and emerging regions. For instance, an icon of the small fry lies in
an index fund that sports the ticker symbol of IWM. On the
whole, the lightweights have a way of outpacing the heavyweights such
as DIA and SPY.
On a downcast note, the developing markets turned in dismal results
during and after the Great Recession. The standard bearers in the
field, which flaunt the call signs of VWO and EEM,
bounced around but made no progress throughout the decade following
the bust of the housing bubble.
In the United States, the real economy has crawled along at a couple
of percent a year on average in the millennium. The meager increase
in output and income did not come close to justifying the huge surge
of the stock market during the 2010s. As we noted earlier, though, a
growing fraction of the profits for American firms comes from foreign
markets. Thankfully, the world economy in toto should expand at a
crippled but bearable pace of 3% a year or so on average over the
next few decades.
At the microlevel of the singular firm, a go-getter can often crank
up its net income by several times any upturn in revenues. For
instance, a hustler that expands its online sales by 10% might
increase its profits by thrice that much. Given this backdrop, an
uprise in earnings of 15% a year on average till the 2030s lies fully
within reach of the Dow index that represents diverse sectors of the
marketplace.
From a larger stance, the foregoing figure of 15% also jibes with the
second half of an expansive wave that straddles the real economy and
financial forum. More precisely, the stock market has a custom of
flourishing when the commodity market flounders; and vice versa. This
supercycle, comprising the inverse hookup between the cost of raw
materials and the pot of corporate earnings, lasts some 34 years on
average.
The last trough of the commodity cycle in the physical economy
cropped up in tandem with the peak of the Internet craze in 2000.
From the burst of the digital bubble to the middle of the 2010s, the
stock market thrashed around but did not get very far. The exemplar
involved the cave-in followed by the retrace of the Nasdaq market to
its prior peak. The good news, however, is that the bourse in the
mid-2010s has shown patent signs of starting the upward phase of the
supercycle. If the past is prologue, then the future looks bright for
the equity mart till the middle of the 2030s or thereabouts.
Long before then, however, international investors should by the
early 2020s venture in droves beyond the relative safety of the U.S.
bourse. In that case, the feisty vessels such as VWO will chalk up
roughly twice the gains snagged by the chief benchmarks such as DIA
and SPY. Moreover the ascent of the emerging regions should parallel
the rousing performance of QQQ despite the endless hail of sideswipes
and smackdowns to beset all manner of markets along the way.
To sum up, the leading companies earn a blooming share of their
profits from the budding countries. For this and other reasons, the
DIA fund is slated to enjoy an uptrend of some 15% a year on average
until the 2030s. In that case, the corresponding turnout for SPY
should be a few percent higher. Meanwhile QQQ ought to rack up
percentage gains reaching into the 20s per year on average. The
latter feat also applies to the corps of bantam firms tracked by the
IWM fund as well as the emerging markets in the form of EEM and VWO.
