However, unlikely interest rates have reached a level
that will begin choking off economic growth. In prior stock market peaks back
to 1987, the 10-year yield averaged 6.5% at the market’s peak. That being said,
rising interest rates are the most credible threat to the economic cycle and
while we are not there yet, this expansion will ultimately end as Fed rate
hikes and longer-term rates reach restrictively high levels.
Looking ahead, geopolitical tensions will provide some
ongoing underlying support to oil, which will help limit crude prices from
returning near that triple-digit mark. It must be noted that crude prices have
risen to a three-and-a-half-year high, driven by concerns over potential
sanctions limiting Iranian supply along with production cuts in the Middle. At over
$78 per barrel of Brent Crude, oil prices have risen sharply but remain well
off of the $100 mark for the next few years. On the upside, higher crude prices
are will provide a boost to energy-sector profits and have thus contributed to
the recent stock market rebound.
Turning to emerging market equities, an asset class that
has struggled somewhat in 2018 after a very strong performance last year. The
main culprit, a rise of the U.S. dollar, because emerging market companies have
a load of debt denominated in US dollars. The dollar index has risen nearly 4%
over the past month, rising to a five-month high last week. At the same time,
roughly 40% of S&P 500 profits come from international markets. However
going forward, we expect to see outperformance in emerging markets as the
dollar’s rise tampers off.
Watching for any key stocks making big moves last week
along with the ETF Global
Behavioral 25 and ETF Global
Quant Movers, we saw big movement in Global Markets, specifically
Europe and Latin America, as well as a blowout in utilities. Key funds included
Utilities Sector SPDR Fund (XLU),
iShares Edge MSCI Multifactor Utilities ETF (UTLF), First Trust Latin
America AlphaDEX Fund (FLN),
and Shares MSCI Italy Capped ETF (EWI). We do expect the
prospective focus to be on interest rates, trade negotiation and corporate cash
flow, which will be a driving force for volatility for the remainder of the
year. Sorting this week’s ETFG Quant
scores based on momentum, you’d see essentially nothing but hedged equity
funds. Investors should prepare by rebalancing their portfolios with a mix of
stocks and bonds based on their risk comfort.
Thanks for reading ETF Global Perspectives!
____________________________________________________________
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