The final quarter of 2016 has started on a quiet note. In the last nine months, the broader market remained fitful thanks to oil price volatility, global growth issues, Brexit referendum and indecision of the Fed regarding rate hike. Still, markets ushered in gains occasionally on dovish central banks in the developed world.
Any good news from the oil patch and favorable U.S. economic data points boosted investors' sentiment sporadically. All these mixed forces have helped SPY gain over 7.7%, DIA add over 7.5% and QQQ moved higher by about 4.7% in the first nine months.
Against such a backdrop, the stage has been set for Q4. Let's take a look at the key events that are coming up and the winning strategies to deal with each event.
Fed Rate Hike
The odds of a rate hike in December spiked after the Fed stayed put, but maintained an upbeat outlook on the U.S. economy in its September meeting. 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. Solid manufacturing and service sector readings and upwardly revised Q2 GDP data (up 1.4%) fueled the rate hike bet further.
Sectors to Hit & Flop: Investors downplaying Wells Fargo's recent sales scandal or questions over the financial health of Deutsche Bank (NYSE:DB) may consider investing in financial ETFs like Financial Select Sector SPDR ETF (NYSEARCA:XLF) or PowerShares KBW Bank ETF (NASDAQ:KBWB) as these stocks perform better in a rising rate environment.
Plus, consumer discretionary ETFs like Consumer Discret Select Sector SPDR ETF (NYSEARCA:XLY) and tech ETFs like Technology Select Sector SPDR ETF (NYSEARCA:XLK) also perform well in the early rate hike cycle as per historical standard. This is because a growing economy normally helps in creating the wealth effect, which leads consumers to spend more as their asset value rises.
On the other hand, high-yielding sectors will likely falter in a rising rate environment. So, Utilities Select Sector SPDR ETF (NYSEARCA:XLU) and Vanguard REIT ETF (NYSEARCA:VNQ) could be at risk. Having said this, we would like to note that these are just initial blows, and after a few upheavals, things should settle down. Investors dreading interest rate hike may also try out this rate-restricted ETF PowerShares S&P 500 ex-Rate Sensitive Low Volatility ETF (NYSEARCA:XRLV). Fidelity Dividend ETF for Rising Rates (NYSEARCA:FDRR) can also be a good pick right now.
Where Will Bond Markets Go?
With Fed hike concerns doing rounds and rates rising by leaps and bounds, bond ETFs started to underperform at the onset of Q4. Several niche bond ETFs may come to investors' rescue in this situation.
Floating rate bond ETFs like iShares Floating Rate Bond (NYSEARCA:FLOT), bank loan ETFs like Highland/iBoxx Senior Loan ETF (NASDAQ:SNLN), inverse Treasury ETFs like Direxion Daily 20+ Year Treasury Bear 3X ETF (NYSEARCA:TMV) or Sit Rising Rate ETF (NYSEARCA:RISE) and negative duration bond ETFs like WisdomTree Barclays US Aggregate Bond Negative Duration Bond ETF (NASDAQ:AGND) are some of the funds to look out for.
The presidential election is slated on November 8 and the gap between Democratic candidate Hillary Clinton and Republican candidate Donald Trump is close. As per the source, Clinton had a 48.4% chance of winning as of October 6, 2016, while Trump had 41.8% chances. Since the wind is in favor of Clinton right now, especially after the apparent win in the first presidential debate, a few Clinton-friendly investments deserve a look.
We suggest medical devices ETFs like iShares US Medical Devices ETF (NYSEARCA:IHI) as Clinton is viewed as the successor of Obamacare policy. However, thanks to her constant exasperation about the price gouging issues in the pharma sector, edgy investors may stay away from pharma and biotech ETFs, though the biotech space is also marching higher on increasing mergers and acquisitions.
Other corners of the market that will benefit from a Clinton presidency are clean energy ETFs like PowerShares WilderHill Clean Energy Portfolio ETF (NYSEARCA:PBW) and defense ETF like iShares U.S. Aerospace & Defense (NYSEARCA:ITA).
As we all know, Q4 is known for its festive events. As loads of retail sales boosting events - Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas - fall in this quarter, all eyes must be on the performance of retailers.
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. Kantar Retail also noted that online sales will surge about 16%.
Oil Output Curb in November?
A surprise OPEC move in September that hints at capping its oil output for the first time in eight years in the OPEC's November meeting will keep oil investors on their toes. Chances are high that oil will remain steady in the meantime barring any sudden setbacks, but any confusion in reaching the definitive agreement may drag oil down severely. Plus, analysts are still unsure if a proposed output cut will be enough to bring oil out of the muted price range. So, oil ETFs including United States Oil (NYSEARCA:USO) and United States Brent Oil (NYSEARCA:BNO) should be in focus.
Volatility to Hold Reins?
With so many key factors lined up for Q4, wild market swings are expected. Investors can deal with this in various ways. The first way out that comes to mind is the low volatility ETFs like The Legg Mason Low Volatility High Dividend ETF (NASDAQ:LVHD) and PowerShares S&P SmallCap Low Volatility Portfolio ETF (NYSEARCA:XSLV). Defensive ETFs like U.S Market Neutral Anti-Beta Fund (NYSEARCA:BTAL) and AdvisorShares Active Bear ETF (NYSEARCA:HDGE) should also help.
However, there is another option in queue - the volatility ETF basket including the likes of C-Tracks on Citi Volatility Index ETN (NYSEARCA:CVOL) and ProShares VIX Short-Term Futures (NYSEARCA:VIXY). As the name suggests, volatility products are pretty erratic in nature and thus suit investors with a short-term notion.