The month of October was pretty eventful with sturdy tech earnings, approval of the budget blueprint in the Senate and House, some upbeat U.S. economic data, a dovish QE taper announced by ECB and Abe’s win in Japan. All these charged up the global markets.
The S&P 500-based SPY, Dow Jones Industrial Average-based DIA and Nasdaq-100-based QQQ tacked on about 2.4%, 4.5% and 4.6% gains, respectively. Let’s delve a little deeper into the events that caused such market movements and are worth watching in November (read: Can ETF Goblins of October Turn into Angels in November?).
GOP Moves Stealthily Toward Tax Reform
A $4-trillion budget measure was okayed by the Senate and House. The Senate chamber agreed to the budget resolution by a 51-49 vote on Oct 19 while the House passed the blueprint in 216-212 votes.
While this raised hopes of the passage of a tax reform, such slim margins point to the likely obstructions as well. Whatever the case, funds like U.S. Tax Reform Fund TAXR, Republican Policies Fund GOP and PowerShares Buyback Achievers Portfolio PKW came in the spotlight in the month (read: GOP Nears Tax Reform: Buy These ETFs).
Small-Caps Regained Strength
Expectations of tax reform and some upbeat economic indicators in the field of home sales, manufacturing and overall GDP once again brought small-cap ETFs like iShares Russell 2000 ETF IWM back into play.
ECB’s Dovish Taper
In a historic meeting, the ECB announced that it would extend its asset purchase program through September 2018 at a reduced rate. The Oct 26 meeting marked the ECB’s first withdrawal of stimulus (read: ECB's Dovish Taper Boosts These ETFs).
As per an article published on Wall Street Journal, Draghi’s open-ended nature of the QE program gave cues that the ECB might not leave the program suddenly in September 2018. CurrencyShares Euro ETF FXE lost about 1.5% in the last one month (as of Oct 31, 2017) and iShares MSCI Eurozone ETF EZU added about 1.2%.
Abe’s Win in Japan
Hopes of easy money policy continued in Japan too with the landslide victory of prime minister Shinzo Abe in a snap election. The win has reinforced his chances of winning another three-year term next September and an extension of “Abenomics.” CurrencyShares Japanese Yen ETF FXY lost about 1% and iShares MSCI Japan ETF EWJ added about 5.3% in the last one month (as of Oct 31, 2017) (read: Japan ETFs in Focus as Shinzo Abe Wins).
Crude Bounced Back
At the end of October, Brent touched its highest level since July 2015 and U.S. crude reached a level not seen since February on a likely extension of OPEC output cut. Markets are now hoping output reduction could be protracted beyond March. As a result, United States Brent Oil BNO and United States Oil USO gained about 7.9% and 4.8% in the last one month (as of Oct 31, 2017), respectively.
Superb Tech Earnings
Blockbuster earnings from the likes of Amazon AMZN, Microsoft MSFT and Google-parent Alphabet GOOGL released at the end of October gave a boost to the tech space. Technology Select Sector SPDR ETF XLK gained about 6.5% in the same time frame (read: Tech ETFs to Soar on Microsoft's Blockbuster Earnings Beat).
Retailers Weakness Prominent Prior to Holidays
The retail sector has seen a slew of bankruptcies this year and the scenario may continue next year too, as per a few analysts. With Toys ‘R’ Us filing for bankruptcy, the trailing 12-month retail default rate was 7.3% in September, up from just above 5% in July and August (read: Profit from Retailers' Defaults With These ETFs).
Plus, Macy's Inc. M and J. C. Penney Company Inc.’s ratings were downgraded by analysts. All these did not bode well for retail ETFs like SPDR S&P Retail ETF XRT, which lost about 5.5% in the last one month (as of Oct 31, 2017). In fact, amid rising default, investment-grade corporate bond ETF iShares iBoxx $ Invmt Grade Corp Bond ETF LQD added about 0.2%.
Treasury Yield Steady & Financials Gain
Benchmark 10-year US Treasury yields touched their highest level since March in late October on hawkish Fed statements. Though hearsay that President Donald Trump is favoring centrist Jerome Powell as the next Federal Reserve chief pulled down bond yields at the end of the month, overall, iShares 20+ Year Treasury Bond ETF TLT lost about 0.04% in a month’s time ended Oct 31, 2017 and Financial Select Sector SPDR ETF XLF added 2.9% as financial stocks perform better in a rising rate environment.
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