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ETFs to Secure Your Portfolio Amid Potential Economic Fluctuations

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With the Fed adopting a dovish stance and increasing estimates of a 75-basis point rate cut in 2024, investors are exhibiting bullish sentiments. The optimistic investor outlook is evident from the 12.16% surge in the S&P 500 Index from the start of November till Dec 21. However, even with a promising future, the economy faces some headwinds.

The possibility of a mild recession in early 2024, along with rising fears of an economic slowdown and significant debt levels cast a pall over the economy’s outlook.

Early 2024 Recession Estimates

Amid conflicting market projections regarding a potential 2024 recession, the economy remains under pressure due to the compounding effects of prior financial tightening. Given the market's strong reliance on investor sentiment, even the slightest suggestion of a recession could trigger a significant downturn in stock prices.

Deutsche Bank forecasts a modest U.S. recession in the initial half of 2024, according to Reuters. According to JP Morgan, the likelihood of a recession persists, with its projection of the S&P concluding the year at 4,200. Meanwhile, Goldman Sachs estimates a remote likelihood of a recession.

While market projections suggest the potential for an economic downturn in the first half of 2024, there's an expectation of economic growth toward the latter part of the following year.

Mounting Household Debt

Over the course of this year, there has been a notable escalation in household debt within the markets. According to Federal Reserve Bank of New York, the cumulative household debt surged to $17.29 trillion, driven by surge in mortgage, credit card, and student loan balances, reaching $12.14 trillion, $1.08 trillion, and $1.6 trillion, respectively. Additionally, auto loan balances rose to $1.6 trillion.

Rising levels of debt increases the probability of consumer defaults, resulting in consumer spending taking a hit. With increasing estimates of a government slowdown, reduced consumer spending can cause further headwinds for the economy.

Sluggish Consumer Demand to Fuel a Slowdown

According to Reuters, both companies and investors continue to make preparations for an anticipated slowdown driven by muted consumer demand. Per Deutsche Bank, as quoted on the Reuters article, based on insights gathered in November from 150 earnings calls during the third-quarter reporting season, companies generally described demand as moderately weak.

Walmart’s (WMT - Free Report) statement in early December indicates that the retailer observed a shift in consumer behaviour, turning more careful. According to Reuters, in its most recent earnings transcript, discount chain Dollar General (DG - Free Report) reported a decrease in gross profit and foresees potential constraints in customer spending in 2024, especially in discretionary space.

Additionally, surveys by the Institute for Supply Management (ISM) indicate moderating consumer spending.

ETFs in Focus

Below, we highlight a few ETFs areas that investors could use to navigate the uncertain environment in a better way to protect themselves from the potential headwinds in the economy.

Investors can increase their exposure to these funds to safeguard their portfolios amid expected increase in market volatility.

Quality ETFs

Amid market uncertainty, quality investing emerges as a strategic response as a potential buffer against the potential headwinds. This approach prioritizes identifying firms with robust fundamentals, consistent earnings and lasting competitive strengths. Investing in such high-quality companies can mitigate volatility for investors.

Investors can look at funds like iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500® Quality ETF (SPHQ - Free Report) , JPMorgan U.S. Quality Factor ETF JQUA and SPDR MSCI USA StrategicFactors ETF QUS (See: High-Quality ETFs for Long-Term Investors).

Consumer Staples ETFs

The potential slowdown in the economy could benefit consumer staple stocks, as these companies manufacture everyday necessities such as food, beverages and household items. Additionally, surging household debt levels could burn a significant hole in consumers’ pockets and prove to be a positive factor for these funds.

Funds like Consumer Staples Select Sector SPDR Fund (XLP - Free Report) , Vanguard Consumer Staples ETF (VDC - Free Report) , iShares U.S. Consumer Staples ETF (IYK - Free Report) and Invesco S&P 500 Equal Weight Consumer Staples ETF RSPS can be beneficial.

Healthcare ETFs

The healthcare sector is non-cyclical nature, providing a defensive tilt to the portfolio amid market turmoil. Further, the long-term fundamentals remain strong, given encouraging industry trends.

Investors can look at funds like Health Care Select Sector SPDR Fund (XLV - Free Report) , Vanguard Health Care ETF (VHT - Free Report) , iShares Global Healthcare ETF IXJ and iShares U.S. Healthcare ETF (IYH - Free Report) .

Utility ETFs

Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus, considered a defensive investment or a safe haven amid economic turmoil.

Investors should gain from funds like Utilities Select Sector SPDR Fund (XLU - Free Report) , Vanguard Utilities ETF (VPU - Free Report) , Fidelity MSCI Utilities Index ETF FUTY and iShares U.S. Utilities ETF IDU.

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