Sharp Twists and Turns

Monday, May 22, 2017 - The placid environment that has prevailed in the markets for much of the year came to an abrupt end this week, as an onslaught of political turmoil in Washington and abroad shattered market complacency and gave rise to fresh volatility. We began the week amid the fallout of Friday's unprecedented multinational cyberattack that infected nearly 300,000 computers in 150 countries. This large-scale ransomware attack, known as "WannaCry", paralyzed businesses and governmental organizations across the globe and raised broader questions about the vulnerability of existing cybersecurity infrastructure and the specter of future, more debilitating attacks. With these concerns percolating into the consciousness of investors, market uncertainty was compounded by the surprise dismissal of James Comey and new allegations that President Trump leaked sensitive intelligence to top Russian diplomats and had requested then FBI Director Comey to drop his investigation into former national security adviser Michael Flynn.

These revelations fueled the already escalating concerns of collusion between Trump and Russia and cast further doubt on the ability of our administration to pass its pro-growth agenda through Congress. In response to Trump's eroding political capital, treasury yields declined sharply, the dollar slid to a six month low, and S&P 500 suffered its worst single-day decline in eight months, shedding 1.8% on Wednesday. While markets stabilized somewhat towards the end of the week, emerging markets were dealt a blow as yet another presidential corruption scandal began to unfold in Brazil. Following Friday's close, the S&P 500 and DJIA were down 0.4% for the week, followed by the NASDAQ 100 which lost 0.6%.

Quant Movers - As cybersecurity concerns were at the forefront of investors’ minds this week, cybersecurity-focused funds, like PureFunds ISE Cyber Security ETF (HACK) and First Trust NASDAQ Cybersecurity ETF (CIBR), received a surge of interest. HACK and CIBR each experienced over 50% increases in their behavioral scores according to our ETFG Quant model, making them some of the top movers in this category for the week. Conversely, sentiment soured on funds perceived to benefit from Trump's policy proposals of deregulation, tax cuts, and infrastructure spending. SPDR S&P Insurance ETF (KIE), Industrial Select Sector SPDR Fund (XLI), Vanguard Financials ETF (VFH), and iShares Transportation Average ETF (IYT) all suffered heavy declines in their behavioral scores. Lastly, our Quant model underscores the changing fortunes of emerging markets stocks, as Brazil's corruption scandal precipitated a massive selloff this week. iShares Core MSCI Emerging Markets ETF (IEMG) experienced the largest drop in its quant score this week, followed by iShares MSCI Brazil Small-Cap ETF (EWZS), iShares Emerging Markets Dividend ETF (DVYE), WisdomTree Emerging Markets SmallCap Dividend Fund (DGS), and PowerShares DWA Emerging Markets Momentum Portfolio (PIE).

Against a backdrop of heightening political uncertainty, volatility seems poised to return to the markets. We suggest reviewing the ETFG Red Diamond Risk and ETFG Green Diamond Reward ratings to help manage risk in your portfolio and zero in on funds that offer attractive risk-reward profiles.

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