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Investor Dilemma: What to Buy In a Slow-Growth Economy?

Friday, 27 Apr 2012 | 11:45 AM ET

The other day a client walked into the office of Josh Brown and asked, “Let’s say we’re at low growth and low interest rates for the next five years and you could only hold one thing, what would it be?”

CNBC.com

“Buy the iShares Morningstar High IncomeETF and go play golf,” answered the financial advisor for New York-based Fusion Analytics, referring to a fund that invests in high yield bonds and dividend-paying stocks.

After the government said Friday gross domestic productexpanded at just a 2.2 percent annual rate in the first quarter, more financial advisors better get ready to answer this question from return-craving clients.

There seem to be two camps in tackling this dilemma: invest in the bonds or stocks of cash-rich companies that have yields above two percent or take the riskier route of picking the correct stocks that can outgrow this economy through innovation.

So far this year, investors have been betting on growth stocks to stay above the sluggish economy as the iShares Russell 1000 Growth Fund is up more than 12 percent in 2012, that’s better than the 7.8 percent return for the iShares Russell 1000 Value Fund.

“Buy Apple as iPhone sales are up 300 percent in China and buy Google because they are ‘Wimaxing’ the world for 11 times forward earnings and buy Exxon because the U.S. is the new Saudi Arabia of natural gas and it just bought XTO energy,” said James Altucher, investor and author. “Also, buy Johnson & Johnsonas aging baby boomers are growing faster than 2 percent.”

But as jobs and other economic figures have come in worse than expected, investors are beginning to believe less and less that any companies can grow their way out of this economic slog.

In the last month, both the value and growth ETFs are unchanged. This speaks to the opinion of many investors that nothing will do well in a two percent growth environment, a figure that fails to even top the 2.7 percent increase in inflation over the last 12 months.

“It's anathema to many investors, but holding cash (and getting almost nothing) in a 2 percent economy is a little like owning put options on every asset class,” said Scott Nations, president and chief investment officer of NationsShares. “If asset prices fall, a cash investor is that much better off and can buy at better prices. If asset prices rally, he or she will miss out, but with rates at 2 percent, how much upside can you expect?”

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:00 ET on CNBC. Follow @CNBCMelloy on Twitter.




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