In August, private payrolls were better than economists forecasted, US budget deficit unexpectedly fell and S&P 500 companies held cash reserves at USD $1.8T or 10.2 per cent of total assets, a 30 per cent increase from 2007 levels.

But minus these positive metrics, investors were faced with a slew of weak macroeconomic news that certainly has been driving markets this year. Notwithstanding there are some fundamental bright spots with companies such as Kraft, Dupont and Johnson and Johnson that are either consistently beating earnings quarter after quarter, raising guidance going forward or significantly improving their profit margins. However top down factors seem to completely overwhelm any bottom line performance and fears are only exacerbated at the sign of any negative economic news.

One thing is for certain. The ‘sweet spot’ investors experienced for most of 2009, achieving gains in both the equity and fixed income markets, appears to be a distant memory. Painstakingly high unemployment, massive contraction in construction and home sales and affirmation of a ‘more modest’ recovery from Fed Reserve chairman in his Jackson Hole, Wyoming statement have riddled investors with fear. It is now common belief we are on the cusp of a double dip recession or a prolonged period of very low economic growth at best.

Unless you are laden with longer dated treasury securities you would have experienced a very low or negative return in your investment portfolios. Even with two and ten year Treasury securities hitting intraday record low yields of 0.45 per cent and 2.42 per cent respectively, this has not stopped an influx of investors into bond funds reaching $120B year to date. This de-risking of portfolios does not bode well for the economy. Not only does this represent very little confidence in the current economic and monetary policies but lends itself to a negative feedback loop as customers delay purchases of homes and other big ticket items on expectations of even lower economic growth.

Contrary to our dismal economic landscape, there are some great opportunities in the market awaiting the brave and courageous few.

Consider structuring a laddered bond portfolio that will allow you to take advantage of changes in interest rates when they do occur. This strategy works well both in inflationary/deflationary cycles. While the intermediate and longer term holdings will contribute better returns during prolonged period in which prices fall substantially, the shorter dated holdings will provide the opportunity to reinvest proceeds at higher rates during an inflationary period.

Incorporating a barbell strategy with some yield enhancements can also provide reliable income and a high degree of principal security. This strategy may incorporate a liquidity as well as a yield generator component. The shorter dated securities can act as the liquidity generator while securities further out on the curve can result in significantly higher yields. Preferreds may be a good option in this regard. Preferreds combine elements of both stocks and bond.

They exhibit bond like characteristics during rising interest rate environments but have a higher priority in the payout profile versus common equity. Like stocks they offer the potential for appreciation while the fixed dividend payments provide regular income similar to that of coupon payments. The universe of preferreds is however much smaller than stocks and it does not carry any voting rights.  Given their attractive yields and risk/return trade off, preferreds can add much needed diversity reducing the overall risk inherent in a pure equity/fixed income portfolio.

And perhaps the most attractive complement to any portfolio during periods of low economic growth is high dividend paying equities in strong companies with solid fundamentals. For the first time since the start of the last bull market in 2003, many of the stocks in the S&P 500 now carry higher dividend versus bond yields. With greater dividend yields investors are given the opportunity to partake in higher current income yet maintain the potential upside of the equity markets. As volatility in treasury markets reach a three month high, the benefits of having this equity exposure in the defensive sectors may prove the only sweet spot that can last for years.

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited.  The Bank accepts no liability for errors or actions taken on the basis of this information.