Healthy Markets - Healthy Earnings?

Monday, October 16, 2017 – U.S. stock markets seemed hesitant this past week but continued into record territory. The Dow Jones Industrial Average and S&P 500 Index saw small gains of less than a percent but still in the green for the fifth consecutive week. The small-cap Russell 2000 Index lagged and recorded a humble loss for the week. Consumer Staples performed well, boosted with help from a surge in Walmart following their announcement of a massive repurchase program and a strong rise in online sales as the holidays draw near.

As of late, stock valuations have seen record setting highs and are forecasted to continue to grow with earnings on the rise. This week brought the first releases of major 3Q earnings reports. Major banks like JP Morgan Chase and Citigroup declined Thursday after reporting lower trading revenues and frequent credit card losses. Wells Fargo reported an earnings decline on Friday, further impacting the broader financials sector. Broadly, we have seen investors side with Industrials, Tech and other resilient sectors in response to this strain on Financials. This can be observed first hand on the ETF Global Scanner.

Even with the turbulent political environment, a series of positive economic reports may have helped compensate for the disruption in Washington. Initial jobless claims during the previous week rebounded, as the impact of hurricanes Harvey, Irma, and Maria on the labor market appeared to be dissipating. Retail sales also jumped in September, clearly showing further resilience in the face of the natural disasters. In fact, consumers entered October feeling better about the economy than they had in over a hundred years, according to the University of Michigan’s gauge of consumer sentiment, which was released Friday.

In ETFs, some of the biggest news included President Trump’s first key piece of legislation in regards to ETF research. Current securities laws offer legal protections for broker-dealers that issue public research reports on some asset classes. Research reports on exchange traded funds (ETFs), however, aren’t protected under current laws. Under the new law, ETF research reports won't be considered offers under securities law, even if the brokers or dealers take part in the registered offering of the investment fund’s securities.

In our ETFG Quant Movers, we saw a shift out of domestic health care centered ETFs and gains in global volatility tracking funds. As expected, winners included PowerShares FTSE RAFI Developed Markets ex-US Small-Mid Portfolio, iShares Edge MSCI Min Vol Europe ETF, and Legg Mason Low Volatility High Dividend ETF, which all gained close to 20% this week alone. We saw similar effects in the opposite direction with CSOP FTSE China A50 ETF and Vanguard Health Care ETF which slid 20.46% and 18.19% respectively. Concerns are also warranted for AGA, BOM, and BLNG, which have popped up on ETF Global Liquidation Watch List – October 2017 with an AUM of under $1 million.

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