Markets

(New York)

Have you heard of the new “doom loop”? The term may seem vaguely familiar, and follows in a long line of sensationalist financial terms. Just like in its origin during the European debt crisis, the term once again refers to a European state sinking under the crushing weight of its own debt. You guessed it, Italy. The doom loop refers to the European bank habit of loading up on sovereign bonds, and in turn creating a negative reinforcment cycle where bonds fall in value, which leads to serious concerns over a bank meltdown, which then exacerbate the original economic fears. That is exactly what is now occurring after Italian bonds sold off steeply following the country’s wild budget approval.


FINSUM: Italy is one of the very largest debt markets and economies in the world, and a full scale meltdown there would surely impact global markets, even the Teflon-coated US stock market.

(New York)

Rates are rising, and with it, investors need to take a closer look at their portfolios. Rising rates can have serious effects on some dividend-focused sectors, such as utilities, REITs, or consumer discretionary, and most bonds. With that in mind, here is an ETF to help combat rising rates. One fixed income ETF built for the current rate environment is the iShares Interest Rate Hedged Corp Bd ETF (LQDH). What makes this ETF special versus others is that it is actively managed and has longer-term fixed income exposures, which stands in sharp contrast to the mostly short-term bonds these funds typically hold. It holds a 3.62% yield and charges 0.24% per year.


FINSUM: That seems a good expense ratio and yield given that this is an actively managed fund. Interest rate hedged ETFs seem like a good idea right now given the strong economy and increasingly hawkish Fed.

(Chicago)

Small cap stocks have been taking it on the chin. They have been getting hammered this week, and their performance (Russell 2000) has lagged the S&P 500 by almost 3% the last few days. That is a rare occurrence, which means there may be a buying opportunity. After such a bout of bad performance, the Russell 2000 has historically outperformed the S&P 500 by a percentage point over the next 20 days.


FINSUM: This could be a good short-term buying opportunity, but as ever, we struggle with these kinds of trade ideas because they seem to be based purely on historical precedent and lack any catalyst.

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