A Few Thoughts on the Next Decade

Monday, December 30, 2019 – We wish our readers a good holiday and a Healthy and Prosperous New Year! Looking at the markets as we close out the year, US investors can breathe a sigh of relief as we appear to have made it through the year without any significant bruises. In fact, 2019 has been a good year to US Investors with 2 trading days to go.

Despite all the worrisome news headlines about which we wrote, US Equity and Global Markets climbed their climb last week. The broad market S&P 500 closed the week and hit a high of 3240.02. The NASDAQ Composite broke thru 9000 to close at 9006.62. Both indexes hitting new all-time highs. In Europe, the STOXX Europe 600 hit an all-time high – up almost 25% YTD. One item that grabbed our attention was the drop in negative yielding bonds since August til now -- $17 trillion down to $11 trillion.  Our readers know our thoughts on the consequences of negative interest rates, so we view this development as a big positive.

While investors are betting on an economic pickup, a trade deal with China and subsequently, higher corporate earnings, we started to think about what the new decade of 2020 might mean for investors....

We expect more volatility in US Markets in 2020. Why? We see a highly polarized election in the US and suspect investors to be sensitive to ever shifting election poll numbers especially the first half of the year. Secondly, structural shifts in the marketplace with limited liquidity from market makers and the newly instituted “free trading” of stocks and ETFs from the retail electronic brokers will encourage more short-term trading in and out of positions due to nearly no frictional costs except tax liabilities. Despite an apparent positive for investors, a friend and an old sage of Wall Street observed “free is usually not good.” We agree in this case.

We note an interesting commentary by Richard Bernstein who sees a trend toward inflation and with that higher interest rates. Quantitative easing, increased use of fiscal policy (i.e., tax cuts, increased military (i.e., space) spending, rising compensation for low paid workers and increased tariffs on goods generally are inflationary, even if the increased costs have not yet shown up in official statistics. All this favors emerging markets and gold according to Bernstein. We agree. In fact, Emerging Markets have had meager returns for investors over the past decade compared to the S&P 500.

This got us thinking about the US Dollar and its dominance in international finance and trade. The US has long enjoyed the benefits since WWII of the role that the US Dollar has offered in borrowing to finance the trade and budget deficits. In the new multipolar world, its dominance is going to be chipped away by the EU, Russia and of course China. The consequence of this will be higher interest rates for US Dollar borrowers including the US Treasury. Our readers know from previous writings what we believe the consequences will be for investors - a shift to higher rates. So, stay turned in the coming decade.

A word about the world of ETFs in the next decade. Look for ETFs to become the dominant investment vehicle worldwide. In the US, the long-awaited ETF Rule and related guidelines recently issued by the SEC will result in a streamlined and less costly process to issue “traditional ETFs.” Investors should expect to see a rush by traditional mutual fund companies to issue non-transparent, actively managed ETFs. Lastly, look for large electronic BDs to offer investors fractional share ETF investing. This is significant as it will be an assault on traditional providers in the 401K market.

All of 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 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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