Daily Gains Letter

Two Ways to Protect Yourself from America’s Deteriorating Economic Divide

By for Daily Gains Letter |

Two Ways to Protect Yourself from America’s Deteriorating Economic DivideAs I’ve been noting in this column since the beginning of the year, there is a major economic disconnect between what is happening on Wall Street and what is happening on Main Street. Eventually, the great divide will come into focus and the U.S. economy will react accordingly.

The evidence: if the stock market is a leading indicator of economic health, then the U.S. is running full steam ahead. The current bull market is now in its fifth year. The S&P 500 is up more than 18% since December 31, 2012 and the Dow Jones Industrial Average is up almost 20% since the end of 2012; both are trading near record highs.

If the life of the average American is the litmus test for America’s economic health, then things are not as rosy as they would appear. U.S. unemployment remains high at 7.5%; median income levels are down 8.1% from their 2007 levels; the number of Americans relying on food stamps has soared 80% to 47.5 million (or 23 million households) since 2007; wages are stagnant; and 40% of Americans have at least one credit card with a balance of close to $15,800.

This economic reality is being reflected in the 2013 first-quarter and second-quarter financial results. During the first quarter of 2013, 78% of the so-called red-hot S&P 500 companies issued negative earnings-per-share (EPS) guidance. For the second quarter, almost 80% of S&P 500 companies have issued a negative outlook.

Sure, the S&P 500 may be reporting strong returns, but it’s not because of an economic recovery. The current bull market has more to do with the Federal Reserve’s $85.0-billion-per-month quantitative easing policies and artificially low interest rates.

And the bad numbers continue to roll in. The Bureau of Labor Statistics reported that while first-quarter productivity increased by 0.5%, in line with expectations, labor costs sank to 4.3%; it was expecting to report a 0.5% increase in labor costs. And it gets worse, as hourly compensation tanked 3.8%. All told, it was the biggest labor cost drop in four years—and the biggest nosedive in hourly compensation ever. (Source: “Productivity and Costs, First Quarter 2013, Revised,” Bureau of Labor Statistics web site, June 5, 2013.)

Even though the unemployment numbers have improved an unremarkable sliver, workers’ pay is actually in sharp decline, while debt is up. In a nutshell, Americans are earning less money, which means they’re saving less, leaving less to pay down debt.

When you consider that consumer spending accounts for about 70% of U.S. economic activity, you have to wonder, in this scenario, if the average American is going to maintain or increase their discretionary spending.

If things are this dire with the Federal Reserve’s $85.0-billion-per-month life preserver, one has to wonder what it will be like when quantitative easing policies are cut back.

Where will this leave the average American investor? I think one of the best things American investors can do with their retirement portfolio is to protect their capital by looking at defensive stocks (consumer staples, healthcare, and utilities). Consumers with less money to spend will also most likely want to stretch their dollar by shopping at Wal-Mart Stores, Inc. (NYSE/WMT). Investors could also research discount variety stores, like Dollar Tree, Inc. (NASDAQ/DLTR) and Fred’s, Inc. (NASDAQ/FRED).

U.S. corporations are spending hundreds of millions on share repurchase programs and ramping up dividends, while the average American worker is earning less. This doesn’t bode well for a full-blown self-sustaining American recovery.

Investors may need to brace themselves.

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