The ETF Portfolio Strategist - Saturday, Sept. 18

Losses continue to weigh on the global markets this week. But not entirely. Another recurring feature this week: Japan stocks continued to lead the small set of winners for our global opportunity set through Friday’s close.

For a second straight week, iShares MSCI Japan ETF (EWJ) was top dog, posting a 0.9% gain. The fund has been up for a fourth straight week and ended Friday's session just below a record high (the fund was launched in 1996).

Some analysts see this as a catch-up rally. “Shares rose because some investors wanted to boost weightings of Japanese stocks in their portfolio. And there’s demand from those who failed to buy Japanese stocks in a rally earlier this month,” says Jun Morita at Chibagin Asset Management.

Whatever the reason, holding an allocation in the country’s equities is paying off handsomely these days — and at a time when global diversification generally is taking it on the chin.

Indeed, most of our global opportunity set was in the red again this week. US junk bonds (JNK), small-cap US equities (IJR), and investment-grade corporates (LQD) offered a bit of ballast, but otherwise there was no place to hide.

US stocks took another hit this week: Vanguard Total US Stock Market (VTI) fell 0.5%, marking the second consecutive weekly decline. But US shares are still up a sizzling 18.4% so far this year and so excuse us if we’re not exactly worried at this point.

Nonetheless, there are some dark clouds on the horizon. Economic news continues to be mixed — the consumer sentiment reading for September, for example, reminds that Main Street is still cautious in a non-trivial degree.

“The steep August falloff in consumer sentiment ended in early September, but the small gain still meant that consumers expected the least favorable economic prospects in more than a decade,” says Richard Curtin, Surveys of Consumers chief economist at the University of Michigan.

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Disclosures: None.

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