Since the Great Recession officially ended in mid-2009, the economic recovery has been far from robust. Not only has the unemployment rate stayed above 8% for 43 straight months, the labor force participation rate is at a 31-year low. And since the beginning of 2010, GDP growth has averaged just +2.1%: It's because of this sluggish growth that the Federal Reserve recently announced its third round of quantitative easing. But don't expect QE3 to suddenly spark 3%+ GDP growth. The first two (and a half) rounds certainly didn't. So how should an investor position his or her portfolio in an economy that continues to just limp along? There are a few places to be:
- Value-oriented Retailers: Sluggish economic growth means the unemployment rate likely won't come down by any meaningful amount for a painfully long time. This means stagnant wages and tight household budgets for the middle class. As a result, people will hunt for bargains at stores that provide the lowest prices. This is really a continuation of a trend since consumers traded down to value-oriented retailers en masse during the Great Recession and never seemed to leave.
- Companies with Wide Moats: Just like a moat would protect a castle from invasions, an economic moat protects a company from competitors who try to steal market share and shrink profits. Companies who can sustain their competitive advantages over time should provide their shareholders with above-average returns, even if the economy is just sputtering along.
- Dividend Stocks: The yields on bonds and cash are ridiculously low right now and will remain that way for the foreseeable future as the Fed maintains its historically accommodative monetary policy. This makes the yields on some dividend stocks look very attractive. Companies with solid balance sheets, strong cash flows and a history of dividend hikes are the ones to watch for.
- Emerging Markets: Growth opportunities may be muted in the developed economies, but a burgeoning middle class in some emerging markets presents tremendous opportunities. Many U.S.-based companies have seen this trend coming for years and have already established a significant presence overseas that will continue driving their profits forward at a healthy clip.