The first half of 2018 was mainly driven by trade, Fed, ECB, tech stocks and oil. All five factors have offered the S&P 500 index a slight gain of 0.6% so far this year (as of Jul 3, 2018), pushed the Dow Jones Industrial Average to the negative territory with losses of 2.6% and driven the Nasdaq Campsite Index to give solid returns of 7.1%. Now it remains to be seen how all such top events of the first half behave in the second.
While the first half was about Trump’s announced trade tariffs, we may see full-fledged retaliation in the second half. China and Mexico announced tit-for-tat tariffs in 1H, but the situation may worsen if the coverage of U.S. import tariffs widens. Since China has been at the center of the trade war, China ETFs like iShares MSCI China ETF (MCHI - Free Report) and iShares MSCI China A ETF (CNYA - Free Report) should be closely tracked. Both funds have declined in the range of 1% to 2% in the last five days (as of Jul 3, 2018).
Political Instability in Europe
Eurozone was riddled with political tensions from Italy and Spain in the first half. And now, the region’s biggest economy is facing tensions to start July. German Interior Minister Horst Seehofer put his paper down to party colleagues late on Jul 1, raising a furor over migration with Chancellor Angela Merkel and threatening her weak government. Meanwhile, the ECB is likely to wind up QE by the end of 2018. Naturally, iShares MSCI Eurozone ETF EZU) will be on watch. The fund was up about 1.4% in the last five days (as of Jul 3, 2018).
How Will OPEC Behave in 2H?
The OPEC members cut a deal to boost output by a lower-than-expected margin. Saudi Arabia said the renewed deal will result in a nominal output rise of around 1 million barrels per day (bpd) (read: What Does the OPEC Agreement Mean for Energy ETFs?).
Now it remains to be seen how far they conform to their deal and rebalance the oil market. United States Oil (USO - Free Report) (up 1.3% in the last five days) and United States Brent Oil (BNO - Free Report) (down 0.4% during the same timeframe) should be watched closely in 2H.
Can Small-Caps Rally Further?
After a superb rally in 1H, small caps do have steep valuation. Per Bloomberg, small-cap stocks are trading at an average of about 26 times their expected earnings for next year. On the other hand, large-company stocks on the S&P 500, are trading at a much cheaper valuation of 17 times. After such a strong rally, profit booking seems normal. But it all depends on how trade talks move ahead in 2H.
Investors can play some top-ranked small-cap ETFs that have historical P/E less than that of the average small-cap stocks. These are First Trust Small Cap Core AlphaDEX ETF (FYX - Free Report) , Vanguard Small-Cap Value ETF (VBR - Free Report) and Small Cap US Equity Select ETF (RNSC - Free Report) . The funds returned in the range of 0.7% to 1.5% in the last five days (read: 5 Top-ranked Small-cap ETFs on Sale).
Will Tech ETFs Maintain the Momentum?
The technology sector witnessed peaks and troughs in 1H, though it emerged triumphant overall. Technology Select Sector SPDR Fund (XLK - Free Report) is up about 10% so far this year (as of Jul 3, 2018). The overall momentum in tech ETFs should stay strong given the tailwinds from tax cuts.
Plus, valuations do not look steep with XLK’s PE of 18.23x versus SPY’s PE of 17.25x. Investors can try out Internet ETFs likeInvesco NASDAQ Internet Portfolio (PNQI - Free Report) (up 1.5% in the last five days). However, concerns over stringent regulations over the social media space may act as a roadblock (read: 3 Tech ETFs Upgraded to Top Rank Amid Trade Fears).
Can Emerging Market Rebound?
Emerging market witnessed the “worst start to a year since the 2013 taper tantrum.” The double whammy of Fed policy tightening and trade tensions “put equity gauges worth $8 trillion in a bear market.” Now it needs to be seen if this bloc gets used to trade tantrum and rebound on its own fundamentals (read: 5 Broad EM ETFs That Lost the Least in Q2).
UBS Global Wealth Management is bullish on the bloc and expects a 15% gain from emerging markets (EM) in the second half. The expectations are based on no further rally in the U.S. dollar and reduced tensions related to Fed's interest rate hikes and trade. iShares MSCI Emerging Markets ETF (EEM - Free Report) added 1.4% in the last five days (as of Jul 3, 2018).
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