(New York)

You have heard it before, and while you might not want to, you need to hear it again. All signs point to the fact that ETFs will likely be the epicenter of the next big market blow up. Investors will be familiar with the argument that the “liquidity mismatch” between ETFs and underlying bonds is a big problem, but the reality is that this is also the case in stocks. While small caps and other less-liquid stocks pose a big threat to ETFs which track them, in a market downturn, even quite liquid shares might be set alight by forced panicked selling by ETFs. Bloomberg gives and an example “Imagine that one big investor in an ETF with, say, a 10 percent stake is forced to sell a large part its holding in a single day. There might not be ready buyers for such a large holding, causing the ETF to fall to a price below the value of the assets it owns. This price impact may be exaggerated, as ETF activity intensifies both upswings and downswings”.

FINSUM: The fact that there are also big risks in equities really opened our eyes. We knew about the bond liquidity issue, but the fact that it extends to both small and large cap equities is quite concerning. Then again, there is a fatalistic logic where this all makes sense: ETFs have been the big growth driver since the Crisis, so it makes sense they would be the epicenter of the next one.

(New York)

Everyone is feeling it, but no one is sure when it might actually come. The big question is when will this bull market end and finally reverse into the bear market everyone fears. While a solid case could be made that it has already happened, Barron’s says it will be in 2020. The logic is that in 2020 the US will be facing genuinely higher rates, and the short-term benefits from tax cuts will have faded from earnings and the economy.

FINSUM: There is a serious argument to be made that the market may have already peaked, but the idea of a 2020 downturn sounds quite compelling too.

(Washington)

The SEC rule has been a getting a lot of pushback both in the press and by industry commentators. Now, in what only seemed a matter of time, a more formal campaign against the new rule is taking shape. The new “Raise Your Voice” campaign is being organized by a group of RIAs and seeks to unite fiduciaries in a push against the grouping of brokers and advisors in the new rule.

FINSUM: While we do see the SEC’s logic in how it drafted the new rule, brokers and advisors are very different animals and we believe more delineation needs to be drawn between the two.

(Washington)

President Trump has been leading a tumultuous trade war with the US’ largest trading partners. So far his efforts have put tariffs on many different goods, but with metals being the single most notable materials. However, a new interview with the President suggests that the metal tariffs were just an opening act to a much bigger area: autos. In an interview with Fox News yesterday, Trump said “You know, the cars are the big one … We can talk steel, we talk everything. The big thing is cars”. Trump is reportedly planning a 20% tariff on all imported cars as part of a national security measure.

FINSUM: We believe this would be a major line in the sand to the US’ trading partners. Both our Nafta partners and the EU, and maybe Japan, would be furious about this, but it is a major source of leverage for the US.

(San Francisco)

In what is a very odd and counterintuitive change, in just a matter of weeks, both Facebook and Google will be removed from the S&P 500’s “tech” sector. Indexes are changing up their alignments, and Google and Facebook, along with Netflix and Comcast, will all now move to a new group called “communications-services”. The changes are due to take place on September 28th and will force investors to trade in and out of billions of Dollars of holdings to realign their portfolios.

FINSUM: What this means is that the “tech” sector, and in factor no sector, will now be such a dominant component of the S&P 500. It may also reshape trading patterns, and according to some, boost volatility.