The latest stretch of gains in the key U.S. indexes might slack in the coming days, if we go by Morgan Stanley comments. Morgan Stanley sees a 10% market correctionover the next three months.
Dovish Fed comments have pushed markets to a record high. However, the enthusiasm quelled a bit in recent trading sessions after expectations of an aggressive interest rate cut by the Fed ebbed last week.
“The possibility of a 50-bp cut has almost dissipated following the WSJ report and the New York Fed's attempt to tone down earlier comments by Williams” per Kenji Yamamoto, economist at Daiwa Securities. St. Louis Fed President James Bullard, one of the central bank’s most dovish policy makers, appeared primed for a 25-bp rate cut in the upcoming meeting.
Actual Fed Rate Cut Could Be Sell-the-News Strategy
Investors should note that the expected rate cut move by the Fed is already priced-in at the current level. So, along with many analysts we believe that the actual Fed action (if there is any) would be more of a sell-the-news kind rather than an opportunity to buy. Investors should note that a lot of the future market movement depends on the Fed’s July meeting and what message it delivers to the investing world.
Rise in Geopolitical Tensions
Geopolitical tensions have also risen following Iranian seizure of a British tanker. This could result in a rally in safe-haven assets. There are also fewer chances that the United States and China could reach a deal anytime soon.
Solid Earnings Beat So Far, But Estimates Were Low
More than 15% of the S&P 500 companies have come up with earnings thus far, per an article published on CNBC. Of those companies, 79% have beaten on the bottom line, according to FactSet data.
However, according to Jeff Zipper, managing director of investments at U.S. Bank Private Wealth Management, the beat ratio is not satisfactory enough as “most of the times when the bar is set so low, the results are likely to be in line or slightly better.”
Against this backdrop, if you dread a near-term correction, the following ETFs might protect your portfolio.
First Trust Alt Abs Ret Strat ETF FAAR
This is an actively managed exchange-traded fund that seeks to provide investors with long-term total return by using a long/short commodities strategy. The fund charges 95 bps in fees.
WisdomTree Dynamic Long/Short U.S. Equity Fund
The WisdomTree Dynamic Long/Short U.S. Equity Index includes long equity positions and short equity positions. The fund charges 48 bps in fees (read: Long/Short ETFs to Survive Market Turmoil).
AGFiQ US Market Neutral Anti-Beta Fund BTAL
Investors, who want to shift their focus to low-beta stocks in this uncertain market environment, can consider adding BTAL ETF to their portfolio. This fund follows the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index benchmark. The index identifies the lowest-beta stocks and goes long on them, while at the same time going short on the highest-beta stocks. The fund charges 76 bps in fees.
WisdomTree CBOE S&P 500 PutWrite Strategy Fund PUTW
The underlying CBOE S&P 500 PutWrite Index is designed to sell a sequence of one-month, at-the-money, S&P 500 Index puts and invest cash at one- and three-month Treasury Bill rates. The fund charges 38 bps in fees.
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