A ray of light for U.S. equities was shining in Tuesday’s early market session after the U.S. removed some items from list of new China tariffs and the additional duty on other goods is postponed to Dec. 15. Yet, the wall of worry was still apparent in the bond markets, which are flashing a recession signal in the inverted yield curve.
“I think there’s a lot of fear embedded in the bond market,” said Jim Paulsen, chief investment strategist at The Leuthold Group. The inverted yield curve “is the biggest risk right now. It’s my number one worry but I think it’s overdone. If economic reports continue to improve, then I think people will decide this doesn’t look like a recession.”
“The fact that we have negative yields around the world makes this somewhat a different signal. The fact we inverted on underheat rather than the normal inversion on overheat makes it somewhat different,” Paulsen added.
Goldman Sachs is forecasting that the ongoing U.S.-China trade war will have a larger effect on growth. In fact, the global investment firm just lowered its fourth-quarter growth forecast by 20 basis points to 1.8%, which could negatively affect U.S. equities moving forward.
Meanwhile, after the U.S. markets got what they wanted in the form of a rate cut by the Federal Reserve, global markets also reacted in tow with falling rates. Will this move put U.S. equities ahead of international equities or will the latter capitalize off potential weakness ahead for the U.S. economy?
The central bank cited “implications of global developments for the economic outlook as well as muted inflation pressures.” The Fed also said it would “act as appropriate to sustain the expansion,” which meant that future rate cuts could take place.
Investors sensing the opportunity can look to relative weight exchange-traded funds (ETFs) to take advantage of any disparity between how the U.S. markets will react versus the international markets.
For investors sensing continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.
- Seeks investment results, before fees and expenses, that track the Russell 1000®/FTSE All-World ex US 150/50 Net Spread Index (the “index”).
- The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities that comprise the Long Component of the index or shares of exchange-traded funds (“ETFs”) on the Long Component of the index.
- The index measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Index (the “Long Component”) and 50% short exposure to the FTSE All-World ex US Index (the “Short Component”).
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