The First Gulf War started in August 1990
The Asian Contagion began in August 1997
The Russian Debt Crisis started in August 1998
US Credit Ratings were downgraded in August 2011
China devaluated the Yuan in August 2015
China again devaluated the Yuan in August 2019
The Financial Times just labeled this the Summer of Fear. Why? A quick look around the globe we see a number of hot spots which easily spook investors: rioting in Hong Kong which dares Beijing to send in the troops, challenges to continued Euro stability via rising tensions in Italy, renewed tension between India and Pakistan over India’s crackdown on Kashmir, financial instability in domestic Chinese Banks, Currency and Trade Cold War between China and the US, weakness in oil markets, signs of economic slowdowns worldwide, hard landing Brexit, continued populist uprisings and lastly an increasing percentage of zero interest rates in government bond markets.
US stocks rose or fell with the news headlines on the US – China Trade War. Relations fell to a new low when China reduced its support of the Yuan leading it to break thru the psychologically important FX rate of 7 to the dollar which lead the US administration to label China as a Currency Manipulator. The consensus view among investors that a deal was around the corner is now dead.
Stocks seesawed and ended the week relatively flat with the large cap weighted S&P 500 closing at 2918.65 and the broader NASDAQ Composite closing at 7959.14 for a weekly loss of .46% and .56%. Nevertheless, the indexes are up YTD at a respectable 16.47% and 19.95% respectively. Gold closed above $1500 for the first time since 2013 and the US 30 Year Bond briefly yielded 2.13% as bond prices rallied as investors sought safety. We expect market volatility to continue for the foreseeable future.
Looking around the globe the trend toward zero and negative interest rates in the G7 peeked our attention. A recent graph from showing that 43% of global bond markets outside of the US now at zero or at negative interest rates. We found to our surprise a particular case in Denmark which may become more widespread. Last week, Jyske Bank, the 3rd largest bank in Denmark announced that it would offer 10 year mortgages at an interest rate of negative .50%. That means that the mortgage loan declines 50 bps per year before the creditor makes a payment! That is a first to our knowledge.
This got us thinking that around the world, investors are willing to give governments their cash for up to 50 years (in the case of Switzerland) for the promise to get back some of their money. This means that investors are willing to forego interest for the peace of mind of storing their cash and hedging i.e., limiting their potential loss with the govt in lieu of parking it elsewhere and risk losing substantially more.
Investors seeking safety in this environment should consider locking in their gains or reallocation into utility, US intermediate and long-term bond ETFs and REIT ETFs. Bond ETFs if rates drop, should provide yield and some price movement participation. Investors who share this view should use the ETF Screener in conjunction with the Select List to place their bets. 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 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 given our views. In the Consumer Staples KXI is our top pick. JHMU is our top ranked in the Utility Sector.
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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