(Washington)

Advisors, don’t hold your breath. Despite widespread criticism from basically every side of the equation, it appears unlikely the SEC is going to do much to correct the major flaws in its current Best Interest Rule. Barbara Roper of the CFA, says that she is “not at all confident” the SEC will make any meaningful changes to the rule “to better protect investors”, pointing out that the SEC had every chance to improve on the DOL rule, but didn’t. “It’s hard to believe that they are going to have a sudden conversion and fix the problems now”, she says.

FINSUM: Brokers, consumer protection groups, and clients all hate this rule (and don’t understand it), and it doesn’t make sense to anybody. Hopefully Roper is wrong and they will change the rule, but we worry they may not.

(New York)

The market has been doing well lately and movements have been relatively calm. That may all be set to change, however, as a big driver of volatility is set to emerge. That driver is the so-called “blackout” period. The blackout refers to the month before earnings releases where companies are barred from repurchasing their own shares. Company buybacks have been a major tailwind for markets this year, with almost $400 bn of buybacks happening in the first half alone, up almost 50% from the prior year. Volatility has been historically higher in blackout periods.

FINSUM: So we are of two minds on this. On the one hand, blackout periods happen very frequently, so why would this one be special? On the other hand, there could be a lot of political and geopolitical (i.e. trade wars) turbulence in the next month, which means this particular period could prove very volatile.

(Beijing)

President Trump has just ordered $200 bn of further tariffs to be applied to Chinese goods. The Chinese have responded strongly, vowing to retaliate to the measures. The Chinese government said “We have been stressing that talks need to happen on the basis of parity, equality and good faith … What the US has done shows no sincerity and good faith at all”. The Chinese says they will impose tariffs on $110 bn of US goods, or about 85% of all US imports to the country.

FINSUM: These tariffs come just before the US and China were set to hold another round of trade talks. We have no idea how those are progressing, but this is really going to anger the Chinese.

(New York)
There has been a lot of doom and gloom about the risks of an inverted yield curve lately. An inverted curve is often seen as the best and most reliable indicator of recession, as it has accurately preceded the last several US recessions. Some are saying this time may be different as market conditions and central bank created stimulus have warped markets. Well, despite the fact that many hate the “this time will be different” mantra, it may actually be true in this case. In particular, the inverted yield curve has only been reliable in the US, whereas in Japan and the UK it is not a good indicator. This means the indicator is by no means universal, and gives weight to the idea that an inversion does not necessarily mean a recession is coming.

FINSUM: The Japanese example is particularly interesting to us as the BOJ has long had extraordinarily accommodative monetary policy. In that sense it may be the best case study for how an inversion could play out this time.

(New York)

Rising rates are upon us. The economy is red hot and a Fed rate hike is imminent, with another likely coming in December. This puts many sectors and stocks at risk. So what are the best sectors and ETFs to invest in right now? Three sectors that stand to benefit are financials, technology, and consumer discretionary, so buying stocks and ETFs there appears a good bet. For technology, Invesco has a momentum focused fund for tech leaders called the DWA Technology Momentum ETF (PTF) which seems interesting. In consumer discretionary, the SPDR Consumer Discretionary Select Sector Fund (XLY) gives good coverage.

FINSUM: All of these bets are cyclical (meaning the sectors benefit because the economy is strengthening when rates rise, which boost consumer spending). Banks are a little bit more compelling to us though, as they benefit from an improved economy, but they also directly gain from rising rates through a better net interest margin.