The Majority of today’s investors don’t believe that they’re going to lose even ten percent of the money they have invested in defensive stocks and ETFs, even though they have just experienced that kind of loss in IYR, XLU, and IYZ. These latter ETFs and their component stocks have become so overvalued that they could drop by half and still not be compelling bargains. After decades of making poor choices with their retirement funds, these investors will make the same mistake in the search for yield and stability. It is déjà vu.

We are finally going through a shift out of defensive dividend-driven ETFs into cyclical ETFs. Eventually the biggest winners will be in the most depressed sector, which is the stocks of commodity producers and emerging-market country ETFs, notably large exporters of raw material. This shift won’t happen smoothly. The average investors will continue their focus fully on the Dow Jones Industrial Average or the S&P 500 Index levels. The fluctuation in both directions will not result in a big change for rest of the year. However, the action will progressively increase as inflation becomes the focal point.

Keep in mind that utility ETF (XLU) and long-dated U.S. Treasuries (TLT) are among the most sensitive assets in recognizing a transition from deflation to inflation and vice versa. Their current decline is sending a message that the global economy is likely to inflate. A steepening of the Treasury yield curve is historically followed by higher prices for raw and precious metals. Eventually this phenomenon will boost emerging-market equities, as well, particularly developed markets with high concentration of commodity production such as Brazil (EWZ), Canada (XIU-TC and EWC), Australia (EWA), and Russia (RSX).