Monday, October 21, 2019 - October is a dangerous month
for investors in the equity markets.
Nevertheless, despite all the headlines concerning the ongoing trade
war, a hard Brexit landing, new military confrontations in Syria, negative
interest rates, global recession concerns, earnings reports, a cooling job
market and economy, disorderly politics in Hong Kong, a slowing Chinese
economy, US stocks shrugged off these worries and continued to climb. Indeed,
the market’s resilience is most impressive.
The broad market, as measured by the S&P 500, closed last week
very close to its all-time high of 3,025.86. Stocks seesawed and ended the week
up with the large cap weighted S&P 500 closing at 2,986.20 and the broader
NASDAQ Composite closing at 8,089.54 for a weekly gain of .54% and .40%
respectively. These indexes are up YTD 19.12% and 21.92% respectively. Gold
prices remained strong closing at $1,490 per troy oz and the US 10 Year Note
was virtually unchanged to yield 1.747. We expect market volatility to continue
for the foreseeable future, especially given October’s history. Astute
investors will need to be on guard to see if the expected interest rate cut by the
Federal Reserve happens on October 30th.
A number of themes caught our eye this week which we want to point
out. First, today’s article from our friends at DataTrek, Nick Colas and
Jessica Rabe suggest that we might be in the midst of the “Great Earnings Reset
of 2019.” They observe that S&P 500 earnings are essentially stuck at zero
and this is preventing markets from making new highs. For a sustainable rally,
they postulate that we need a positive resolution to the US-China Trade War. We
encourage you to look at their report on Linked-In.
On a bright note for those who follow contrarian indicators, last
week’s cover story in Barron’s
was on “Upside Down” Interest Rates i.e., the growing number of
negatively yielding bonds around the globe. Media attention like this usually
foretells the peak of the investment theme which leads us to think that
interest rates may be on the verge of bottoming and starting an upward move. We
also note that looking around the world, we sense there is a general move by
the G7 to reflate using fiscal policy given that monetary policy has reached
its limits to support the real economy. Last week’s better than expected
earnings reports from JP Morgan and Citibank also indicated that the US economy
might not be headed for recession.
Keep in mind, given such low rates, a slight upward move can
create significant dislocations in not just fixed income markets, but real
estate and other levered investments.
Investors in hedge funds should take note. The US Dollar Index fell last
week by 1.2% - a significant drop.
Looking at the charts, the dollar index peaked in 2017 and has hovered
in that area since. A weakened dollar
would be a boost to Emerging Markets Debt and US Cyclicals which derive
approximately 40% of their revenues from overseas.
Lastly, most disturbing was last week’s report by the IMF which
warned that the global bond bubble has put the global financial system at risk
as fixed income funds as vulnerable to liquidity shocks. This is primarily due
to holdings of illiquid high yield investments which cannot be liquidated to
meet shareholder redemptions. The canary in the coal mine indicator is the
problem involving the liquidation of the Neil Woodford funds in Europe. The
report provides ample scares just in time for Halloween.
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.
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.
Thanks for reading ETF Global Perspectives!
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