Fed chair Jerome Powell recently commented on the U.S. economic and corporate health amid the COVID-19 outbreak. Per the Fed chief, global lockdowns and financial squeeze both on household and corporate fronts will leave a prolonged adverse impact.
The Fed chairman cautioned that the current downturn “may last until late 2021.” He also said that the U.S. economy could "easily" contract by 30% in the second quarter. However, he expressed confidence that the economy would recover over the long term, and said he would never bet against the U.S. economy.
He does not see the economy entering another Depression, per CNBC. "This economy will recover. And that means people will go back to work. Unemployment will get back down. We'll get through this," Powell said.
A super-dovish Fed and a Congress, which have already passed about $3 trillion in rescue funds and is planning another round, would hold the economy back from slipping into a depression. The Fed also indicated that the central bank is not out of ammunition and can expand existing programs or add new ones, if needed.
Here's How the Optimism Can be Played Via ETFs
Bet on Small-Caps
Small caps should also gain on massive monetary and fiscal stimulus. In early April, the Fed announced an investment of up to $2.3 trillion in various measures that included loans to aid small and mid-sized businesses too. The Fed’s Main Street Lending program can be considered as a plus for pint-sized stocks.The U.S. government’s virus relief bill should lend support to small-cap stocks. There was a forgivable loan program in place under the scheme of Paycheck Protection Program(read: Fed Goes the Extra Mile: 6 ETF Areas to Win).
The small-cap ETF iShares Russell 2000 ETF IWM (up 13.4%) beat the S&P 500 (up 5.5%) past month (as of May 26, 2020). While Sprott Junior Gold Miners ETF (NYSE:GDX) SGDJ, Invesco (NYSE:IVZ) Dynamic Building & Construction ETF PKB and ALPS Medical Breakthroughs ETF SBIO are some of the small-cap picks that can enjoy the sector-specific strength, small-cap growth ETFs like Vanguard Growth ETF VUG and SPDR Portfolio S&P (NYSE:SPY) 500 Growth ETF SPYG can also be played to tap the optimism (read: Bet on "American Magic" With 4 Solid Small-Cap Sector ETFs).
Dollar Strength in the Cards?
Powell’s comments over long-term U.S. economic recovery and ultra-easy monetary policies in other countries should make the U.S. dollar stronger in the coming days. Invesco DB US Dollar Index Bullish Fund UUP, WisdomTree Bloomberg U.S. Dollar Bullish Fund USDU and VelocityShares Daily 4x Long USD Vs GBP ETN DGBP are some of the products to play the trend.
Consumer Stocks to Gain
Bank of America Corp (NYSE:BAC). has begun to see consumer spending inch higher after plummeting with the start of the coronavirus lockdown. Gradual opening of U.S. states is likely to result in an uptick in consumer demand, albeit at a sluggish pace.
Consumers’ income that fell 2% in March and is likely to slide further in April and May due to lockdown, should start to improve ahead, if there is not any second wave of virus contagion. A measure of consumer confidence rose to 86.6 this month from 85.7 in April, according to the Conference Board. Economists polled by Dow Jones expected consumer confidence of 82.3 in May, per CNBC.
Notably, Invesco S&P SmallCap Consumer Discretionary ETF (PSCD) jumped 29.4% past month and large-cap Consumer Discretionary SPDR ETF (XLY) gained 9.8% past month, breezing past the S&P 500.
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iShares Russell 2000 ETF (IWM): ETF Research Reports
Invesco DB US Dollar Index Bullish ETF (UUP): ETF Research Reports
Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports
Invesco Dynamic Building Construction ETF (PKB): ETF Research Reports
Invesco SP SmallCap Consumer Discretionary ETF (PSCD): ETF Research Reports
Sprott Junior Gold Miners ETF (SGDJ): ETF Research Reports
Vanguard Growth ETF (VUG): ETF Research Reports
ALPS Medical Breakthroughs ETF (SBIO): ETF Research Reports
SPDR Portfolio SP 500 Growth ETF (SPYG): ETF Research Reports
WisdomTree Bloomberg U.S. Dollar Bullish ETF (USDU): ETF Research Reports
VelocityShares Daily 4x Long USD vs GBP ETN (DGBP): ETF Research Reports
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