We are now in the final quarter of the year. The journey so far has been anything but smooth. The first quarter of the year faced the double whammy of an oil price slide and Chinese market turmoil, the second quarter was all about Brexit-related worries and the third quarter was spent on speculating the timeline of the next Fed rate hike and discussing several central banks’ moves.
Still, markets ushered in gains occasionally whenever global central banks including the Fed stayed dovish, and the buy-the-dip sentiment took an upper hand. Any good news from the oil patch boosted investors’ sentiment and economic data points came in favorable.
All these mixed forces have helped SPY gain over 7.7%, DIA add over 7.5% and QQQ move higher by about 4.7% so far this year (as of September 30, 2016). With the fourth quarter likely to see the events stated below, investors can expect the same mixed show.
Key Events to Take Place in Q4
Fed Hike: Talks of a rate hike in December have flooded the market after the Fed stayed put but maintained an upbeat outlook on the U.S. economyin its September meeting. In fact, in the September meeting, “three officials, the most since December 2014 dissented in favor of a quarter-point hike,” as per Bloomberg (read: 6 ETF Areas to Watch as Fed Meeting Starts).
Though Fed chief Yellen indicated no "fixed timetable" for a hike, market watchers expect one in December as the November meeting will happen just before the presidential election – a highly sensitive time for a rate hike. If the Fed does not hike rates in December, economic conditions will be considered too soft to afford even a single 25-basis point hike in 2016 after a liftoff in December 2015.
Presidential Election: The presidential election is slated on November 8 and the race between Democratic candidate Hillary Clinton and Republican candidate Donald Trump is likely to be very close. As per the source, Clinton had a 45.6% chance of winning as of September 29, 2016 while Trump had 44.6% chances.
Though Trump is breathing down Clinton’s neck, the wind is in favor of the latter, especially after the apparent win in the first presidential debate. Whatever the case, presidential election and rate hike worries are likely to keep the market edgy in Q4 (read: Clinton Apparently Won First Debate: ETFs in Focus).
Holiday Season: With the final quarter of the year underway, all eyes must have turned toward the performance of retailers as the October–November period embraces the key holiday season. As loads of sales-boosting events – Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas – fall in this quartile, the sector generally sees a sales boost.
Research agency Deloitte expects holiday spending to rise 3.6-4% from this November through January, in line with 2015. On the other hand, Kantar Retail expects a 3.8% jump in spending, higher than the 3.4% gain seen in the last holiday season.
4 ETFs to Buy
In this light, we highlight four ETFs that could be great picks for the fourth quarter.
iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI - ETF report)
Since the Fed has higher chances of acting in December, a rising interest rate scenario would be highly profitable for the financial sector. We pick this broker-dealers ETF which will likely benefit from rising rates and a recovering economy.
S&P 500 ex-Rate Sensitive Low Volatility Portfolio (XRLV - ETF report)
Since both presidential election and rate hike fears will cause considerable volatility in the market, a low volatile and an ex-rate sensitive pick like XRLV should be an intriguing choice.
Amplify Online Retail ETF (IBUY - ETF report)
Kantar Retail noted that online sales will surge about 16%, while eMarketer predicts that this year’s holiday sales through ecommerce will cover up about 25% of total retail ecommerce sales for 2016 (read: Consumer Confidence Hits 9-Year High: ETF Winners).
Investors should also note that the consumer discretionary sector is cyclical in nature, and normally performs better in a trending economy, irrespective of the rate hike fear. The cyclicality of the sector and an expected surge in sales makes IBUY our choice (read: 3 Retail ETFs & Stocks Can Defy Soft Data).
iShares PHLX Semiconductor (SOXX - ETF report)
The technology sector has been in a great shape lately thanks to return of risk-on sentiments and better-than-expected Q2 results from some sector bellwethers. Within the broader tech space, semiconductor, the value-centric traditional tech area, is likely to have an upper hand thanks to a still-edgy investing backdrop. Higher demand from emerging technology applications like tablets and smartphones despite still-subdued PC shipments are tailwinds to the space (read: 4 Best ETFs & Stocks to Tap the Tech Boom).
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