Monday, March 11, 2019

Staying the Rate Course

Monday, March 11, 2019 - Markets sold off last week after a good run since the New Year. The first week of the March was the worst down week for investors since December in both the US and Europe. US Equity Markets ended the week down with the large cap weighted S&P 500 closed at 2,743.07 and the broader NASDAQ Composite closed at 7,408.14 for a weekly loss of  2.16% and  2.46%.  Nevertheless, the indexes are up a solid 9.42% and 11.65% year-to-date—not a bad gain to lock-in for those of the faint of heart.

Early in the week, reports that the US Trade Deficit widened to record levels put investors on yellow alert. Then the old concerns that we have heard before took over investors’ attention: an accelerated European slowdown, a hard Brexit Landing, a rising US Dollar and then Friday morning’s extremely negative swing in the Jobs Data fueled the sell-off.

Overseas things were not better. Weak OCED and European Central Bank reports led Mario Draghi to pivot and signal that the Bank would hold interest rates at near zero levels longer than was expected thru year-end and he indicated that new credit facilities would be implemented to maintain banking liquidity and encourage additional lending to the private sector. Nevertheless, European Banks sold off as did the Euro.

Investors in China focused on the February trade numbers for both exports and imports which dropped considerably implying an accelerating slowdown - investors promptly sold off domestic stocks.

By Sunday night, investors welcomed a 60 Minutes TV Interview with “Boom Boom” Jerome Powell (see our January Blog) who indicated that the Fed was well aware of the various outside risks (Brexit, European and China slowdowns, worldwide low inflation pressures), as well as, recent disappointing Employment data and concern on upcoming retail sales. Two things he communicated was that the Fed will stay the course with interest rates and respond as necessary to new developments and that he intended to serve out his four-year term regardless of any bullying from the POTUS – who by law, could not fire him. These comments were well received in Asia at the Monday opening and will likely stabilize market for the time being.

News on the immediate horizon that will fuel volatility this month is the looming Tuesday Confidence Vote on the May Government as well as the March 29 Brexit Resolution Deadline with the EU and any announcement of a trade deal with China. On the latter, we expect a minor deal covering specific goods, services and commodities however, the thornier and more significant issues such as Intellectual Property protection, Currency Manipulation, and Monetary Policy controls are likely to be elusive for now especially with the “Made In China 2025” Industrial Technology Initiative so sought by Beijing in full swing.

Look for the US Administration to talk down the US dollar in an effort to boost US exports and help countries carrying high debt burdens.

We expect market volatility to pick up as indexes test technical support levels, particularly the DJ Transports. The next recession is the most anticipated recession of all times according to Ed Yardeni yet it has yet to materialize. This is the significance to Sunday night’s interview with Chairman Powell who indicated that the Fed will continue to be sensitive to any economic headwinds as well as be diligent to inflationary pressures over 2% annually.  The “Fed Put” is well intact. Sectors likely benefit from a weaker dollar include Energy, Materials (Commodities), Industrials and Emerging Market Countries carrying high debt levels.

Nevertheless, Investor sentiment is increasingly cautious as concerns ranging from the economic fallout from govt shutdown i.e. the recent Jobs report, increased questioning of corporate earnings quality, stability in the oil markets, credit concerns, and Brexit which appears to be headed for a hard landing.  Investors are reducing exposure to risk assets and again focusing on a global slowdown. This creates opportunities for traders and active investors who can use ETFs to take advantage of real-time market volatility –both up and down!

To take advantage of this, we suggest looking at our ETFG Weekly Select List. To best support the ETF selection process, The ETFG Weekly Select List highlights the 5 most highly rated ETFs per Sector, Geographic Region and Strategy as ranked by the ETFG Quant model.

We highlight a couple of ETFs that attracted our attention for investors seeking to benefit from US dollar weakness:  in Materials, GOAU, GDX, and SGDJ; in Energy OIH, EMLP and AMLP score high; in Industrials, FLM, FIDU, FTXR and XFFS top the group.

We also would suggest looking at China ETFs for those that would be expected to hold Midcap Chinese companies given the upcoming expanding weighting of China stocks in the MSCI Emerging Markets Indexes. The stocks to gain the most will be mostly Midcap which are not currently found in the large cap ETFs like FXI.

We suggest keeping a mindful eye on tools like our Select List and Risk and Reward Ratings that can be used to evaluate the vast set of opportunities in the ETF marketplace. Today’s market realities require a new approach to macro investing, one in which individual investors now have access to tools via ETPs to customize risk and return profiles in their portfolios. Use our Scanner to find those funds.

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