Uncharted Waters

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Monday, March 16, 2020 – Once again, markets are rapidly moving this morning as the U.S. Federal Reserve announced a second emergency rate cut to zero on Sunday in conjunction with Central Banks around the world. Chairman Jerome Powell announced that Monetary Policy had run its course and that a Fiscal Stimulus is needed to stabilize the economy and markets. Nevertheless, today, equity markets in Europe collapsed down over 9% and several European airlines announced plans for bankruptcy filings unless they received government bailouts. There are also signs that global money markets are starting to freeze up although the issues have been managed to date. The drop in U.S. interest rates will help relieve stress in Emerging Markets.

This comes despite President Trump’s attempt to calm the markets late Friday afternoon with announcements that the U.S. would attempt to stabilize oil markets with buying for the U.S. Strategic Oil Reserve and a relatively weak fiscal cushion for workers affected by the downturn. Obviously, investors worldwide are not impressed with the U.S. policies designed to address the situation. Washington’s response is viewed as a day late and dollar short to address this crisis. This will not go unnoticed in the upcoming November elections should they not get postponed if virus containment strategies continue into the Fall. In a short period of time, the Corona medical crisis has transformed into an economic downturn and a financial crisis.

Last week, oil prices appeared to stabilize around the low $30s and all equity prices made moves in excess of 5% up or down daily. While this morning, the 10 Year Treasury Yield bond lingers around .8%. Nevertheless, the US appears to be heading toward negative interest rates.

As we head into this week, “Cash is King” with the SPY down almost 9% in pre-market trading.

U.S. markets closed down last week with the S&P 500 finishing down 8.79% and the Nasdaq Composite 8.17%. The broad market, as measured by the S&P 500, closed the week at 2,711.02. The NASDAQ Composite closed at 7,874.88. Both indexes ended the week down sharply with the DJIA officially entering a bear market. For the record, the Bear Market occurred in 19 days from top to bottom. As a footnote, the S&P 500 Energy Index dropped 24.28% for the week and is down 47.14 YTD. These numbers are of historic proportions.

This is a developing crisis on the scale of 2008 at least or perhaps worse. Expect emergency Central Bank Rate Cuts have run their course. Expect preparations for sector bailouts and large fiscal spending plans to “save capitalism.” These efforts however will be stymied by supply chain bottlenecks and public fear of the Coronavirus. Recession across the globe is occurring although not officially verified. Expect dislocations in political regimes.

Despite global volatility, ETPs had USD $31.52 billion in net inflows in February and $98.68 billion YTD. A bright spot for ETF Issuers. The main losers of the current meltdown are likely to be mutual funds, hedge funds and private credit funds.

Investors should take heed of the underlying securities in high yield ETFs and money market funds as credit markets should be expected to freeze up. At some point, asset prices will reach a bottom and investors should be prepared to take advantage of ETFs to build portfolios. Rapid price volatility challenge quantitative strategies and ratings.

To best support the ETF selection process, our 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.

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