While the Dow Jones Industrial Average rose during the first half of 2014, its performance was lackluster, with gains of just 1.7 percent. There have been several issues plaguing the market from tepid retail sales, a sharp decline in U.S. GDP during the first-quarter, and a concern that stocks in general are overvalued after rising sharply in 2013.
Furthermore, we have seen individual stocks in the Dow underperform. Financials such as JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS) have taken hits on trading businesses. Wal-Mart (NYSE:WMT) was a victim of the weak retail environment in the first half. IBM (NYSE:IBM) continues to see declining sales and this has finally begun to eat into its profits.
Nevertheless, there have been some assets that have performed extremely well during the first half, and there is a good chance that this is going to continue. Furthermore, if we look at the assets that are outperforming a trend begins to emerge that suggests that the rest of 2014 could be rough.
1. The Market Vectors Junior Gold Miner ETF (NYSEARCA:GDXJ)
The GDXJ rose an incredible 30 percent during the first half of the year, although keep in mind that this was after the fund lost most of its value in 2013. Junior gold miners have performed well as the gold price has begun to recover. Furthermore, these companies have largely responded well to the weak gold price by cutting costs, and this has increased the benefit of a strong gold price. Despite tapering concerns the gold market appears to be setting up for more gains in the second half of the year as central banks such as the Bank of Russia dump Treasuries in order to buy gold. If you are looking for a high-beta way to play this trend then the GDXJ is an excellent choice, although keep in mind that this leverage operates in both directions. Investors looking for a less risky approach should consider the SPDR Gold Trust (NYSEARCA:GLD), or better yet, the Sprott Physical Gold Trust (PHYS), which has favorable tax treatment for long term holders.
2. The iShares Barclays 20+ Year Bond ETF (NYSEARCA:TLT)
The strong performance in bonds has surprised virtually everybody except for the contrarian investors. Everybody was bearish of bonds toward the beginning of the year, and yet the TLT outperformed the Dow Jones by about 10 percent. This is probably due to a few factors including short covering, continued demand coming from the Federal Reserve, and the beginning of an exodus from stocks.
If we continue to see the stock market underperform, and especially if we see another quarter or two of negative GDP growth then we can see the bond market outperform. But keep in mind that the supply-demand fundamentals for bonds are abysmal, and that the TLT is good for a trade only. After all the supply of bonds keeps rising, and their ability to generate returns seems to diminish every day as interest rates remain low. Nevertheless, the trend is your friend, and bonds will rise higher until they don’t.
3. The SPDR Oil and Gas Exploration and Production ETF (NYSEARCA:XOP)
This fund has been an excellent performer year to date having risen 20 percent. Unlike the more popular SPDR Energy ETF (XLE), this fund focuses on companies that are more directly leveraged to oil and gas prices, and as you know oil and gas have risen significantly over the first six months of the year. As a result, the companies who focus on producing oil and gas have performed extremely well.
This is bad news for the rest of the economy given that oil and gas prices touch virtually every part of it, but with geopolitical tensions in the Middle East and in the Ukraine a rising oil price is inevitable. Many of the companies featured in the XOP are shielded from this geopolitical tension, and so this fund should continue to be an excellent way to play the increase in energy costs.
Disclosure: Ben Kramer-Miller has no position in the funds or stocks mentioned in this article.
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