AdvisorShares Weekly Market Review – Week Ending 3/14/2014
Highlights of the Prior Week
After receding some, early last week the the situation in Ukraine has now become the situation in Ukraine and Crimea after a hastily called for referendum for Crimea to secede from Ukraine and become part of Russia passed on Sunday. Complicating things further is that the US and most of the Western World is unlikely to recognize the outcome over questions of legality of the referendum.
An interesting snippet from Barron’s considered Russia’s ownership of US Treasury debt which is generally viewed as a source of stability for its foreign exchange reserves;Federal Reserve data released late Thursday showed that holdings of U.S. Treasury securities by the Fed for foreign and official accounts plunged by more than $100 billion in the week ended Wednesday, which is more than three times the next biggest weekly decline. Suspicions immediately pointed to Russia, which has threatened to dump its cache of U.S. government paper if sanctions are imposed.
The S&P 500 was down 1.97% last week as this story continued to evolve and the yield on the ten year US Treasury fell 15 basis points to 2.64%.
If the weekend’s developments are worrisome, you wouldn’t guess by the markets’ early Monday reaction, generally higher across the board, even in Europe.
The big news at home in the new week will likely the first FOMC meeting Chaired by Janet Yellen. Thus far she has managed to avoid roiling markets (her predecessor wasn’t so smooth in his transition to the top spot) but the announcement from this meeting will serve as another first in her tenure.
Jeff Miller notes the following about the Fed meeting from his weekly look ahead:
1. Rate hikes might come faster than expected. This is for one of two main reasons:
1. Lower labor force participation.
2. Lower growth potential.
2. There is plenty of labor slack from cyclical forces, suggesting the need for patience.
3. Status quo. See Chicago Fed President Charles Evans.
The threat of an economic slowdown in China is certainly nothing new but may be coming closer to fruition based on data and quotes being attributed to Chinese officials. CNBC reported that the most recent report for industrial output came in at 8.6% versus an expectation of 9.5% and that retail sales were also light with an 11.8% increase versus an expectation of 13.5%.
Premier Li Keqiang talked earlier this week about “severe challenges” ahead. Earlier in the week export number plummeted, last week Shanghai Chaori Solar Energy Science & Technology made news after a debt default and earlier this month Bloomberg reported that Finance Minister Lou Jiwei said 7.2% GDP would meet this year’s target of about 7.5%.
It is impossible to know whether or when China will face a true slowdown (some would argue China has been slowing down for a while) but for as long as this has been a threat and given the poor performance of the Shanghai Composite Index which is down slightly in the last five years compared to a 144% lift for the S&P 500, the impact of a slowdown may already be priced in. Obviously there is no way yo know but down after five years of money printing makes it a distinct possibility.
ETF News & Data
Instead of the usual look and new funds and fund flows from the previous week in this space we wanted to isolate some highlights from the ETF Roundtable in this week’s Barron’s which devoted a lot of space to actively managed ETFs and expectations for how the industry will evolve.
There are obviously many providers of actively managed, traditional mutual funds who have not (yet?) made a foray into the ETF space and are left “explaining to their boards how they missed” the ETF emergence.
To this point former PowerShares executive Ben Fulton quipped;
This is Amazon versus Barnes & Noble. The mutual fund companies are brick-and-mortar Barnes & Noble, trying to figure out how to compete with Amazon. This is just the continued death rattle of mutual funds.
Matt Hougan from ETF.com predicted that the entire ETF industry will grow to $15 trillon in assets in the next decade, eclisping assets held in traditional funds.
The discussion also explored “silly” funds or funds that for various reasons have evolved to become silly like, in the panel’s estimation, some of the funds tied to the CBOE Volatility Index (VIX) with some of the funds “to the point where it is guaranteed to lose money.”
The big takeaway is that even though the first ETF is 21 years old, the industry is still young, will have many changes ahead which will lead to opportunities for advisors to construct more effective and efficient portfolios for clients but with those opportunities will come the need for time spent learning and researching this continued evolution.
The New York Times posted a difficult but powerful read about Sportcenter Anchor Stuart Scott’s now seven year battle with cancer. Everyone has of course been touched by cancer one way or another. The article had at least two very important takeaways. One was the extent to which Scott tried to maintain his normal routine. He can’t always, no patient can, but he makes it a high priority and the article discusses why this is important when battling illness.
Another important takeaway is an unusual thought process from Scott which is that he has told doctors he does not want to know what stage his cancer is in. A big part of his management of his disease is maintaining his positive mental outlook and he believes that would be difficult to do if the answer to the question of stage was a scary number.
Again; difficult but powerful.
Get ready for productivity to plummet this week as the first round of the NCAA Mens Basketball Tournament will be played Tuesday and Wednesday night with all games airing on truTV. Those games of course will be the warm ups for all day second round games on Thursday and Friday airing across four networks simultaneously for the third year in a row making it easy for people who’ve scheduled time off (insert wink here) to watch whatever games they prefer.
The most interesting game in the second round stands to be previous upstart and now number 5 seed Virginia Commonwealth against number 12 seed Stephen F Austin in the South region. Aside from the 5-12 matchup being prone to upsets, SF Austin has not lost since November, riding a 28 game winning streak into the tourney.
And as a bit of a head-scratcher, defending champion Louisville thought to be in contention for a 2 seed or maybe even a 1 seed was seeded fourth in the Mid-West region where they will exact vengeance on the Manhattan Jaspers.
Roger Nusbaum AdvisorShares ETF Strategist
Weekly ETF Flows
For March 10, 2013 to March 14, 2014
S&P Sector Analysis
As for the sectors of the S&P 500, six outperformed the broad benchmark – Utilities, Staples, Telecom, Energy, Healthcare, and Materials. The remaining four – Technology, Discretionary, Financials, and Industrials – each underperformed. The dispersion between the top-performing and bottom-performing sectors rose to 5.54% this week, with Utilities outperforming all, and Industrials coming in last.
For March 10, 2013 to March 14, 2014
Sector performances, as measured by the S&P 500 sector indices were: