Narrow but Records

“True genius resides in the capacity for evaluation of uncertain, hazardous and conflicting information.” - Winston Churchill

Though these words were not said about the stock market, they can certainly resonate with anyone who has been following it over the past year. As 2016 started, bullish sentiment was almost unheard of.  Macro factors throughout the global economy were too large to miss and fear overtook the investment community.  Eight months later, we are in the dog days of summer.  China’s economy had almost collapsed, Britain voted to exit to European Union and major countries have introduced negative interest rates. The anomaly here is that the stock market is hitting record highs. As an investor, if you decided to stick with the sentiment from the beginning of the year and did not try to evaluate the uncertain, hazardous and conflicting information that 2016 has bought, you would’ve missed out on it all.

Switching gears to our exchange-traded-funds world, we’ve yet again seen the largest inflows into equity ETFs.  As yields throughout the global stock markets continue to shrink, the returns from equities look tempting even though they bring on more risk.  Another $3B found its way into those funds by midweek, as you can see on the ETFG fund flows report.

The technology sector has been a major player in the markets rally to record highs and the Technology Select Sector SPDR Fund (XLK) has been riding that wave. This week, the fund hit yet another closing day high at $47.16 and has returned nearly 10% YTD.  This came as Apple (AAPL) returned to mid-April levels and Microsoft (MSFT) was tittering with a new 52-week high.  They both make up 13% and 10% of the fund respectively.

As for the ETFG Quant movers, we saw the greatest change in the iShares Currency Hedged MSCI EAFE Small-Cap ETF (HSCZ), which added 8.21 to its Quant score.  It is currently graded as a “B” in our Quant scoring. This fund seeks to reduce the impact of foreign currencies, relative to the U.S. dollar in small-cap, in non U.S. and Canadian equities. As said last week in our blog, the current environment of stretched large cap equity valuations make small cap ETFs look attractive as vehicles of growth and price appreciation. Compile that with the strong U.S. dollar and increasing possibility of an interest rate hike by the Federal Reserve and you find a nice fund that can both protect you and offer some growth.  Let’s see what happens after Summer when everyone returns.

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