Volatility continues to reign over the capital markets as the Dow Jones Industrial Average is continuing to remind investors that the strategies implemented in the historic bull run may no longer be viable. As such, investors and financial advisors need to scrutinize their exchanged-traded fund (ETF) investments even further in order to suss out any strategies that are no longer providing sustainable returns.
In this latest “In The Know” update featuring market themes and opportunities, Samantha Azzarello, Global Market Strategist at JP Morgan ETFs, discusses opportunities that can be had as investors prepare to close the books on 2018.
U.S. Equities Still Have Room to Run
Investors this year have seen the S&P 500 become the longest bull market in history, which may have fear-riddled investors hesitant to jump into the capital markets due to being late to the party. However, some market experts like Azzarello prognosticate that there’s still time to capitalize on opportunities even in a late market cycle.
With a spate of earnings results scheduled to be reported this week from the likes of tech giants like Amazon and Microsoft, it could help temper the current volatility in U.S. equities. It could serve as a reminder that opportunities in U.S. equities could still be had if approached with caution.
“We think growth continues, earnings growth continues–mind you, it comes down in 2019, but still positive” said Azarello. “So we still want exposure to U.S. equities, but in a way that I would say is a little bit more cautious, a little bit more quality-based.”
International Markets are a Buy-and-Hold
The U.S. stock market has been the default play for investors even as the bull market heads out of the latter stages of its market cycle, but when the well runs dry, it could be opportunities abroad that could get the lion’s share of investor capital. Emerging markets, in particular, have been marred by the trade wars between the U.S and China, causing a negative ripple effect into emerging market ETFs.
While the majority of investors might be driven away by the red prices in emerging markets, they should be looked at as being substantial markdowns, especially if trade negotiations between the U.S. and China result into something materially positive.
“Trade wars and a strengthening dollar have caused havoc in international markets this year,” said Azzarello. “I think short-term it’s actually a buying opportunity because we still believe in the longer-term story. They key is you want to dampen volatility in the international markets and you want to hold them.”
With respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that could be realized by sifting through these discounted assets. With value coming into the forefront over growth and momentum, it’s a perfect time for financial advisors to steer investors towards more value.
“Growth still makes sense,” said Azzarello. “However, if we want a little bit more of a tilt in the portfolio given where we are in the cycle, we would say, ‘Add a bit more value.'”
“Emerging markets have been kind of immune to Fed rate increases–that’s been good,” Azzarello added. “However, the dollar strengthening has been really hard on emerging markets year-to-date. We don’t expect that to persist and we do think there’s value there.”
Get and Stay Invested Even as Rates Rise
Last month, the Federal Reserve raised the federal funds rate by 25 basis points–the third rate hike this year on the tailwinds of strong economic data. The latest sell-offs in October have been blamed on rising rates, causing investors to fret over whether they should stay on the sidelines.
While investors typically shift from U.S. equities to the safer confines of government debt, rising rates could also be worrying investors in conjunction with inflation that could tamp down returns from fixed-income assets. However, Azzarello views this as a blessing in disguise.
“Rates going up is a good thing,” Azzarello said. “I know it doesn’t feel that way when fixed-income returns are going negative. However, at some point, we are going to benefit from some more income in the fixed-income market and it’s something that just has to happen.”
While the temptation to stay in cash is alluring with factors at play affecting both stocks and bonds, Azzarello recommends that investors tell their clients to stay invested.
“They key thing would be we want to always continually get and stay invested,” said Azzarello. “And there’s ways to do that which make sense after a 10-year bull (market) so this doesn’t have to be cash on the sidelines or all into the market.”
To watch the entire latest “In the Know” show, visit: https://am.jpmorgan.com/us/en/asset-management/gim/adv/insights/etfs-in-the-know.