Domestic vs. International Forces

Monday, September 10, 2018 – This past week, investors engaged in an all too familiar exercise: the weighing of mixed signals in the market. A constant balancing act between positive, domestic economic growth and mounting geopolitical tensions and sagging international economic momentum that has defined the investment environment this year. To date, notwithstanding a few bouts of market jitters and heightened selling pressure, investors have largely ignored signs of risk and instead helped propel the U.S. stock market to its longest bull run in history. However, in a reversal, the balance of positives and risks tipped towards the latter as another encouraging jobs report was unable to overcome the specters of an intensifying trade war and heavier tech scrutiny.

Record unemployment benefit applications, rising worker productivity figures, and August's encouraging jobs report, which revealed that wages grew at the fastest pace in nearly a decade and the economy add a fresh 201,000 jobs, failed to surmount the sharp escalation of US-China trade tensions and increasing regulatory pressure on the tech sector. Trade tensions, which appeared to be easing with recent progress made towards a revised NAFTA, suddenly spiked as the Trump administration announced the possibility of an additional $267 billion on top of the threatened $200 billion in tariffs on Chinese imports. Altogether, these tariffs would cover essentially all of Chinese imports and have for grave implications for global supply chains. Meanwhile, the breakneck growth of the tech sector appears to be in peril, as Congress lambasted Twitter and Facebook executives for their lax security controls and raised the prospect of greater regulatory oversight of social media companies. These developments helped sap any momentum in the markets and sink the tech-heavy Nasdaq to its worst week in nearly six months, declining 2.6%. In addition the DJIA lost 0.2% and the S&P% suffered its first decline of over 1% in two months.

ETFG Quant Movers – Our ETFG Quant Model captures the divergence in global economic fortunes, as domestically focused ETFs are favored by our model, while internationally focused funds lag. Small Caps, which are more insulated from global trade tensions and have been buoyed by the recent tax cuts, heavily populated our top ranked funds, with the SPDR S&P 600 Small Cap Value ETF (SLYV) and SPDR S&P 600 Small Cap ETF (SLY) ranking as the 2nd and 3rd highest rated ETFs.

Conversely, international ETFs, which are considerably more vulnerable to global trade tensions, sit near the top of our weekly Quant losers list. In total, 7 out of the 10 funds on our weekly Quant losers list have an international focus. These include PIMCO RAFI Dynamic Multi-Factor International Equity ETF (MFDX), X-trackers FTSE Emerging Comprehensive Factor ETF (DEMG), Developed International Equity Select ETF (RNDM), SPDR Global Dow ETF (DGT), iShares Core MSCI Europe ETF (IEUR), X-trackers MSCI EAFE High Dividend Yield Equity ETF (HDEF), IQ 50 Percent Hedged FTSE Europe ETF (HFXE), and WisdomTree Europe Quality Dividend Growth Fund (EUDG).

Against this backdrop of heightening uncertainty, our quant model can help investors navigate these difficult conditions and identify opportunities within the broad and ever-growing ETF marketplace.

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