In Mid-May we saw the first signs of a market pullback, and volatility crept into major indexes as news emerged surrounding the president’s Russia affairs, as well as the noise around the firing of James Comey. The market saw the worst declines since September during the third week of May when large caps fell about 2%, though they quickly recovered only two days later. On June 9,markets were disrupted again, led by a rout in technology stocks, as investors reacted to a sharp run-up since the elections.
The concern is that President Donald Trump and his administration will be unable to push through economic policies, which could lead to both uncertainty and potentially volatility re-entering the broad-based equity markets. More specifically, expected tax cuts have been the leading impetus for pushing equity markets ahead, and now it looks like tax reform and fiscal stimulus are going to at least take longer than we have expected.
Were these last two pullbacks just hiccups with our ever-running bull market set to recommence its steady positive climb? Or is it time to think about repositioning portfolios and looking for short-term trades that match up with the market’s reaction to current events? While we do not offer an opinion on the future of the markets, we do offer various tools advisors can employ to express their opinions on short-term market movements for opportunistic alpha, or longer-term portfolio solutions to protect or profit from broad-based market and sector declines.
Here is an idea for uncertainty around a pullback: utilities. If the flight to safety is on your mind in the short term, trading utilities is a way to add defensive investment tools to a portfolio. Utility stocks have been known to do well when the S&P 500 pulls back; they tend to be stable investments for income and noncorrelation to broad-based equity indexes. Using a utilities ETF provides both geographic and single name diversification. If you are an investor that is ahead of the game, or perhaps have already selected your single name electric, water and gas or one-beta ETFs tracking the various utilities indexes available, you might consider an inverse ETF that targets the sector.
Where can we find some growth and potential upside? We’ve seen positive momentum outside of the U.S. Developed and emerging markets have been cheap for some time now, and strengthening compared with US stocks. Year to date, developed market stocks have been outperforming their U.S. counterparts, returning 12.34% through early May, versus the U.S., with positive 7.5% growth. We can put a spotlight on Japan as well, where we see the region as both a stand-alone, returning 7% year to date; and as a major component of the developed market index with a 23% weighting.