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ETF Predictions for a Historically Low August

Sanghamitra Saha

The month of August started off on a shaky note for Wall Street with the Fed apparently offering a hawkish outlook at July-end and severity in U.S.-Sino trade relations coming to the forefront. In the past five days (as of Aug 5, 2019), the S&P 500-based ETF SPY, Dow-Jones-based ETF DIA and Nasdaq-100-based ETF QQQ are off 5.2%, 5.0% and 6.5%, respectively.

On Jul 31, the Fed has come up with a hawkish rate outlook. Though the central bank cut rates in July, the bank noted that the cut was simply a “midcycle adjustment” and that the committee does not see clear economic weakness that would require a long rate-cutting cycle. Such hawkish comments weighed on Wall Street.

President Trump’s announcement of a 10% tariff on $300 billion in Chinese imports that aren’t yet subject to U.S. duties came as a shock to the broader market to start August. The new tariff will be levied starting Sep 1. Another $250 billion in Chinese goods are already subject to a 25% U.S. tariff.After market close on Aug 1, the President said the new round of tariffs could be increased beyond 25%.

As an apparent retaliatory move, China's central bank set the yuan’s daily reference rate below 7 per dollar for the first time in over a decade. The Chinese government has also reportedly asked its state-owned firms to stop imports of U.S. agricultural products. All these news were enough to rattle global markets.

In fact, a consensus carried out from 1950 to 2018 shows that August ended up offering positive stock returns in 38 years and negative returns in 31 years, per moneychimp.com, with an average return of negative 0.22%.

If history is any guide, the month can easily be touted as subdued. Against this historical market performance, let’s make some ETF predictions for the month.

Treasuries to Soar Ahead

Be it Fed rate cut or trade tensions, all things point at a nice journey in U.S. treasury ETFs. A safe-haven rally against an edgy market backdrop should favor treasury bond ETFs like 25+ Year Zero Coupon U.S. Treasury Index ETF Pimco (ZROZ), Extended Dur Treasuries Index ETF Vanguard (EDV) and SPDR Long Term Treasury Portfolio ETF (SPTL) (read: Treasury ETFs Rally to New Highs on New Tariff Threats).

Rotate to Non-Cyclicals: Bet on Healthcare & Utilities

The healthcare sector has been a laggard in the past month’s bull rally, calling for cheaper valuation. Health Care Select Sector SPDR Fund XLV was off 2.1% in July against 1.9% gains (as denoted by Technology Select Sector SPDR Fund XLK) in soaring sectors like technology. Now, tensed economic as well as market sentiments could make the safer healthcare sector more appealing. Also, as per Equityclock, healthcare enjoys seasonal strength in August.

On the other hand, utilities should do well on safety trade and a likely decline in bond yields. The present scenario should be great for this rate-sensitive high-yielding sector. Utilities Select Sector SPDR Fund XLU should be on investors’ watch.

Market Volatility Will Flex Muscle

U.S. stocks witnessed their biggest loss of the year on Aug 5. Market conditions have been so heated up this month that volatility levels shot up. iPath Series B S&P 500 VIX Short-Term Futures ETN VXX was up 32% in the past year (as of Aug 5, 2019). We expect volatility levels to remain elevated throughout the month (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).

Marijuana Guilty of Overvaluation, Subdued Earnings & Scandals

Marijuana or cannabis stocks fell in the past month with ETFMG Alternative Harvest ETF (MJ) losing 14.5% (as of Aug 1, 2019). Though efforts to go big, and mergers and acquisitions have been pretty robust in the space, valuations may be high. The space had a smooth run in the beginning of the year.

However, short sellers “have steadily increased their exposure to the cannabis sector this year with short interest in the top 20 most shorted stocks climbing 78% to $1.89 billion, according to financial analytics firm S3 Partners”, as quoted on MarketWatch.

A host of weaker-than-expected earnings from Canadian licensed producers, “the ousting of Bruce Linton from market leader Canopy Growth Corp. and a scandal involving illegal growing at CannTrust Holdings Inc.” have hit cannabis stocks lately, per MarketWatch (read: Marijuana ETF Space Gets Packed).

Consumer ETFs to Get Hit?

Consumer ETFs had a great run this year with discretionary ETF XLY and staples ETF XLP returning 20.3% and 16.6% this year. As tariff tensions heat up, inflation in the U.S. economy should perk up. Along with most market watchers, we too believe that companies will try to pass on some cost escalation to consumers. Moreover, higher inflation would give a boost to bond yields. This, in turn, might push up consumers’ borrowing costs and hurt iShares U.S. Consumer Services ETF IYC and First Trust Nasdaq Retail ETF FTXD.

Per Stephen Lamar, executive vice president of the American Apparel & Footwear Association, “new tariffs would hit U.S. consumers far harder than Chinese manufacturers, who produce 42% of apparel and 69% of footwear purchased in the United States.” Retail associations predicted an increase in consumer prices. Target Corp TGT shares fell 4.2% on Aug 1 following the news of fresh Trump tariff, Macy's Inc M tumbled 6.7% and Nordstrom Inc JWN was off 6.9%.

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
iShares U.S. Consumer Services ETF (IYC): ETF Research Reports
First Trust NASDAQ Retail ETF (FTXD): ETF Research Reports
Technology Select Sector SPDR Fund (XLK): ETF Research Reports
Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
Consumer Staples Select Sector SPDR Fund (XLP): ETF Research Reports
Health Care Select Sector SPDR Fund (XLV): ETF Research Reports
Utilities Select Sector SPDR Fund (XLU): ETF Research Reports
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
Vanguard Extended Duration Treasury ETF (EDV): ETF Research Reports
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
SPDR S&P 500 ETF (SPY): ETF Research Reports
Nordstrom, Inc. (JWN) : Free Stock Analysis Report
Target Corporation (TGT) : Free Stock Analysis Report
Macy's, Inc. (M) : Free Stock Analysis Report
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