The U.S. economy added 170,000 nonfarm payrolls and the unemployment rate currently stands at a low 3.7 percent, but capital markets are still expecting the U.S. Federal Reserve to cut interest rates this week. Will a 1/4-point cut continue to provide strength for U.S. equities?
The Commerce Department recently reported that Gross domestic product (GDP) fell during the second quarter to 2.1 percent, but still bested Wall Street analysts who were expecting a larger decline. GDP fell from 3.1 percent in the first quarter, which represents the weakest increase since the first quarter of 2017.
Initial forecasts were that that GDP would increase by 2 percent.
Economists at global investment firm Morgan Stanley said that a U.S. recession is not an unrealistic expectation, and the case for a bearish turn for the markets is a plausible one given a protracted U.S.-China trade war. Relatively speaking, this could put U.S. equities on watch for future weakness, giving exchange-traded fund (ETF) investors an opportunity to play U.S. versus international equities.
The majority of the capital market is looking for an interest rate cut by the Federal Reserve to propel the major U.S. indexes, but a sluggish showing in second-quarter earnings could mean that U.S. equities could be overvalued. Would a less-than-stellar second-quarter earnings showing put international equities over U.S. equities?
“The market is pricing in a 25 basis point cut,” said Quincy Krosby, chief market strategist with Prudential Financial. “We already know of two Fed presidents who don’t think we need it, so there’s obviously going to be a discussion, with the strong data. The chairman, who is in the camp that we need to have an insurance cut, is going to make the case that while the economic data are all gaining strength, they are still worried about weakening conditions, due to uncertainty regarding trade and tariffs.”
For investors looking to play the international equities over U.S. equities angle, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) gives investors the opportunity to capitalize on this hunch. RWIU seeks investment results, before fees and expenses, that track the FTSE All-World ex US/Russell 1000 150/50 Net Spread Index. The FTSE All-World ex US/Russell 1000® 150/50 Net Spread Index (R1AWXUNC) measures the performance of a portfolio that has 150 percent long exposure to the FTSE All-World ex US Index and 50 percent short exposure to the Russell 1000® Index.
It’s not all doom and gloom for U.S equities with some analysts noting that of all the companies that have reported second-quarter earnings thus far, 79 percent are beating estimates and even notched 4.1 percent in growth. As such, 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.
For more relative market trends, visit our Relative Value Channel.