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8

How to Profit From the "New Normal"

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For investors, it looks like pessimism is the new black -- the must-have accessory of the season. Despite news that the economy is stabilizing and that job losses are diminishing, scores of Americans continue to play the Grinch when it comes to the stock market's prospects.

After being caught largely unaware by the recent financial crisis, gun-shy investors have become wary of this year's market rally and seem to expect another correction in the near future. And some of the smartest minds in the business appear to agree with them.

The best offense is a good defense
Investors have good reasons for being suspicious of the market's comeback. So far, the rally has been largely concentrated in lower-quality sectors and securities -- the very areas of the market that got knocked for a loop last fall at the apex of the financial crisis. Stable companies with solid fundamentals and strong balance sheets haven't participated in the market run-up nearly as much. And practically no one is predicting that a period of robust growth is in store for the U.S. economy. As a result, many folks are getting defensive and hoping to ride out the expected period of subpar growth ahead of us.

Fixed-income master Bill Gross is among those sounding the alarm to be defensive in the current environment. In a recent letter to fundholders, he argues that the "New Normal" is a world in which lower returns are par for the course. Slower growth and greater government regulation will restrain corporate profits and put a damper on stock returns. Gross predicts that even high-growth companies will start to act more like utilities, so investors should think about actually buying utility stocks, which should hold up better in slow-growth times.

Slow and steady
So is this really the best that investors can do? Buy boring utilities and hope to eke out a small, marginal return for the next few years? Well, don't be so quick to knock utilities. While they certainly won't provide the growth and excitement of high-flying tech names like Apple (Nasdaq: AAPL  ) , utilities typically do provide one benefit that tech stocks don't -- dividends. In a low-growth environment, steady but high-yielding stocks may come back into vogue. Utilities certainly haven't been big winners in this year's rally, which means there may be more untapped upside in that sector than in many others.

For instance, look at the good values that some utility names offer right now, along with their healthy dividend payouts:

Stock

Forward P/E Ratio

Dividend Yield

Entergy (NYSE: ETR  )

12.1

3.7%

FPL Group (NYSE: FPL  )

11.6

3.6%

Xcel Energy (NYSE: XEL  )

12.8

4.8%

Source: Yahoo! Finance.

In my opinion, all of these particular utility names also have some decent growth prospects ahead of them as well, which you can't say for many utility companies. That means that not only will you get defensive staying power and a hefty dividend yield, but you'll have the opportunity for meaningful future growth as well!

All is not lost
Of course, even if our economy drags its feet for the next couple of years, that's not to say there won't be pockets of greater opportunity out there. One area that I'm expecting good things from is health care.

It remains to be seen whether Congress will pass any form of health-care reform, but even if the current effort fails, this sector is ripe for future attempts at reform, which could be a tremendous boost for health-care stocks. But to get the greatest bang for your buck, you might want to look downstream a bit at mid-sized health-care names like Alexion Pharmaceuticals (Nasdaq: ALXN  ) and medical-equipment distributor Henry Schein (Nasdaq: HSIC  ) . Firms like these are likely to have greater room for reform-fueled growth than many bigger name health-care plays like Johnson & Johnson (NYSE: JNJ  ) .

Lastly, it's important to remember that the greatest growth prospects in the world over the next decade are likely to come from beyond our border. So don't forget to dust off your passport and go in search of some foreign names for your portfolio -- especially from emerging markets. This spicy sector will serve up some volatility along the way, so be prepared for a wild ride. However, longer-term results here should help offset the anemic growth the U.S. is likely to encounter in the years to come.

No one knows exactly what is around the corner for our economy, but we can be pretty sure that a return to heady, late 1990s-style growth is not it. Investors may want to step up their portfolio's defenses, but at the same time, shouldn't totally give up on growth. A well-balanced and well-diversified range of holdings is most likely to achieve success even if Bill Gross's "New Normal" proves to be reality.

For more insider tips on investing and personal financial planning, take a look at the Fool's Rule Your Retirement service, which provides top-notch retirement and mutual fund advice. You can start your free 30-day trial today.

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein. Apple is a Motley Fool Stock Advisor recommendation. Johnson & Johnson is a Motley Fool Income Investor selection. The Fool owns shares of FPL Group. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2009, at 3:19 PM, BMFPitt wrote:

    I like Xcel Energy, but I fear buying any company that puts its name on a sports stadium/arena.

  • Report this Comment On December 08, 2009, at 4:41 PM, lewellen180 wrote:

    "For investors, it looks like pessimism is the new black ... After being caught largely unaware by the recent financial crisis, gun-shy investors have become wary of this year's market rally and seem to expect another correction in the near future. And some of the smartest minds in the business appear to agree with them."

    You could call me a pessimist - some of my more bullish friends do, in fact.

    On the other hand, some of my perma-bear friends call me too much of an optimist.

    In truth, I'm a realist - and will just come out and admit that I don't *know* what the market's going to do.

    Neither do the really smart guys like Bill Gross. They may be better at guessing than I am (heck, they *are*), but they don't know for certain any more than I do, let alone have precise timelines.

    I sort of saw the bust coming in real estate, but didn't see how bad it would get, nor how fast it would get there. Likewise, I knew a recovery would happen sometime, but didn't know when or, again, how fast. Just like a lot of other people.

    So I did what I usually do - put in $XXX per month into a set of index ETFs, with purchases each month intended to get me closer towards my target allocation. I also continued to put in $YY per month into individual stocks just for fun. (Keeps me from messing with the core allocations that much ... and one of which happens to be FPL - great company.)

    Since I don't know what the future holds, the set of index ETFs is on the defensive side (thus the "pessimist" label) and I felt comfortable continuing to put money in each month - the way I do it, with more money tending to go towards sectors that have been beaten down (thus the "optimist" label).

    What's my point? Other than the one at the top of my head, just that nobody knows what will happen in detail.

    At some point the pessimists will be right, there will be a crash. At some other point, the optimists will be right and the rally will be sustainable and huge. So to me, it makes most sense to keep to my allocations, put in some each month, and never, ever, have money in the market that I definitely need soon or can't afford to lose.

    Cheers,

    - Lewellen

  • Report this Comment On December 08, 2009, at 4:43 PM, lewellen180 wrote:

    "For investors, it looks like pessimism is the new black ... After being caught largely unaware by the recent financial crisis, gun-shy investors have become wary of this year's market rally and seem to expect another correction in the near future. And some of the smartest minds in the business appear to agree with them."

    You could call me a pessimist - some of my more bullish friends do, in fact.

    On the other hand, some of my perma-bear friends call me too much of an optimist.

    In truth, I'm a realist - and will just come out and admit that I don't *know* what the market's going to do.

    Neither do the really smart guys like Bill Gross. They may be better at guessing than I am (heck, they *are*), but they don't know for certain any more than I do, let alone have precise timelines.

    I sort of saw the bust coming in real estate, but didn't see how bad it would get, nor how fast it would get there. Likewise, I knew a recovery would happen sometime, but didn't know when or, again, how fast. Just like a lot of other people.

    So I did what I usually do - put in $XXX per month into a set of index ETFs, with purchases each month intended to get me closer towards my target allocation. I also continued to put in $YY per month into individual stocks just for fun. (Keeps me from messing with the core allocations that much ... and one of which happens to be FPL - great company.)

    Since I don't know what the future holds, the set of index ETFs is on the defensive side (thus the "pessimist" label) and I felt comfortable continuing to put money in each month - the way I do it, with more money tending to go towards sectors that have been beaten down (thus the "optimist" label).

    What's my point? Other than the one at the top of my head, just that nobody knows what will happen in detail.

    At some point the pessimists will be right, there will be a crash. At some other point, the optimists will be right and the rally will be sustainable and huge. So to me, it makes most sense to keep to my allocations, put in some each month, and never, ever, have money in the market that I definitely need soon or can't afford to lose.

    Cheers,

    - Lewellen

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Amanda Kish
TMFBroadway

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter.

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