Monday, September 25, 2017

New Frontiers and Similar Challenges

Monday, September 25, 2017 - Amid a week that was headlined by the onset of the Federal Reserve's "quantitative tightening" and a sharp escalation of tensions between the nuclear-armed adversaries North Korea and the US, the S&P 500 and DJIA managed to eke out their second consecutive weekly gains. On Wednesday, the Federal Reserve announced that it would leave its benchmark interest rates unchanged, but left open the possibility of another rate hike before the end of the year. What's more, the Fed announced its plans to begin normalizing its $4.5 trillion balance sheet of treasuries and mortgage-backed securities in October. This marks an inflection point for investors, as the Fed's unprecedented bond-buying program has undergirded financial markets since the 2007-08 financial crisis and has helped buoy stock and bond markets to record highs. Investors and the Fed will now have to navigate uncharted waters, with there being nothing close to a historical precedent for this sort of large-scale balance sheet reduction.

Conditions in these uncharted waters got further turbulent for investors as a fiery exchange between the leaders of North Korea and the US raised the specter of military confrontation and, more ominously, nuclear war.  Despite this, stocks moves were largely muted as the major benchmarks traded within a tight range and remained at their historic highs. Attesting to the calm that has taken hold in the markets, the fear-gauging CBOE Volatility Index has fallen for nine of its last ten trading sessions and currently sits at record lows. The S&P 500 ended the week up less than 0.1%, while the DJIA advanced 0.4% and the Nasdaq shed 0.3%. This lack of volatility is yet another example of how desensitized the markets have become to geopolitical threats and political uncertainty.

Select List - The gains in the stock market this week were largely propelled by gains in the financial sector, which was buoyed by the FOMC's policy guidance and resultant prospect of a steeper yield curve. For those looking to benefit from the expected gains in financial shares in an environment of rising rates, we suggest monitoring the financial section of our weekly Select List. Currently, our quant model ranks the iShares Edge MSCI Multifactor Financials ETF (FNCF), First Trust Nasdaq Bank ETF (FTXO), Global X China Financials ETF (CHIX), PowerShares KBW High Dividend Yield Financial Portfolio (KBWD), and ProShares Global Listed Private Equity ETF (PEX) as the top five funds in this sector with the most attractive risk-reward profiles.

Conversely, stocks that have benefited from a low-rate environment were dragged down this week by the prospect of monetary tightening. For those looking to remain in interest-rate sensitive sectors, like utilities, here's the top five rated utilities funds by our model at the moment - iShares Edge MSCI Multifactor Utilities ETF (UTLF), John Hancock Multifactor Utilities ETF (JHMU), Reaves Utilities ETF (UTES), iShares Global Utilities ETF (JXI), and Utilities Select Sector SPDR Fund (XLU).

It will be quiet period in terms of economic news, as we enter the final week of the third quarter. US consumer confidence, new home sales, and durable goods readings, along with US and UK revised GDP figures will be the key economic events. Developments from the North Korea-US confrontation and health care and tax legislation in Congress will also be in focus.

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