Monday, December 4, 2017

Was That Vol We Saw?

Monday, December 4, 2017 - U.S. equities were whipsawed this past week by optimism sparked by tax reform progress in the Senate and fears conjured up by former National Security Advisor Michael Flynn's guilty plea in cooperation with Special Counsel Robert Muller's probe. The markets began the week with all eyes fixated on Washington, as investors awaited the Senate's impending vote on its version of the tax reform bill. Passage of the bill in the Senate Budget Committee on Tuesday and the newfound backing of several GOP holdouts on Thursday injected optimism into the markets and fueled gains. Positive tax reform developments in conjunction with an encouraging Fed Chair confirmation hearing for Jerome Powell, robust tech earnings, extension of OPEC production cuts, upward revision of U.S. Q3 GDP, rising October consumer spending, 17 year high consumer confidence reading and other upbeat economic data releases helped catapult equities to record highs through Thursday. Stocks appeared to be heading up towards an uninterrupted week of gains, as all 11 S&P 500 sectors rose on Thursday and the DJIA hit its fifth thousand-point milestone, after surging 330 points to close above 24,000 for the first time.

However, the markets hit a snag on Friday with the news of deficit hawks and other wavering GOP senators impeding tax reform progress and most importantly, the sudden announcement of Flynn's guilty plea and cooperation with the special counsel's inquiry into Russian election interference. These abrupt, ominous developments unleashed one of the most volatile trading days of the year, as the Dow registered its widest trading range since Brexit, gold and government bond prices spiked and the VIX shot up nearly 30% at one point during the day. Despite this bout of political uncertainty, the major indexes were able to pare their losses and remained in record territory following news of a compromise in the Senate tax push and the continued allure of a brightening global economic outlook. At the close of the week, the DJIA, S&P 500 and Russell 2000 all registered gains at 2.9%, 1.5%, and 1.2% respectively, while the Nasdaq decline 0.6%.

Expect this week's volatility to continue as the intensifying Mueller probe casts a pall over the markets and Congress has to hastily reconcile two competing tax bills from the House and Senate.

ETFG Quant - The leaders and laggards of this week's ETFG Quant rankings are closely tied to the trajectory of progress in this week's tax reform push. Several of our top rated funds are currently financial-oriented products. A tax overhaul is expected to particularly benefit financials, as it will raise their net-interest margins and lower their effective tax rate, which is currently one of the highest of the major S&P 500 sectors. Funds including the First Trust Nasdaq Bank ETF (FTXO), SPDR S&P Insurance ETF (KIE), and Fidelity MSCI Financials Index ETF (FNCL) experienced large gains in their ETFG Quant scores. FTXO is currently the 8th highest rated ETF according to our model and KIE and FNCL received the 6th and 9th largest weekly Quant score gains. Other perceived beneficiaries of a tax overhaul, like the Guggenheim S&P Small Cap 600 Pure Growth ETF (RZG) and SPDR S&P 600 Small Cap Growth ETF (SLYG), were among our top Quant gainers this week.

Conversely, ETPs representing sectors that will be adversely impacted by the proposed tax overhaul heavily populated this week's top quant losers. ETPs that have heavy exposure to minimum volatility, safe haven/dividend proxy, and multinational stocks were among the top losers this week. Among these ETPs were the iShares Edge MSCI Min Vol USA ETF (USMV), Schwab US Dividend Equity ETF (SCHD), Vanguard Utilities ETF (VPU), and SPDR S&P Technology Hardware ETF (XTH).

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