What’s In Store for March? / Factors Fall Hard

Changes are coming to the investment world in the month of March. The U.S. stock market did not waste any time setting a record, and the Dow Jones Industrial Average traded above 21,000 within minutes of the opening bell this morning. The market was on Dow 21,000 Watch for only 35 calendar days (24 market days), proving that each new 1,000-point milestone is closer than the previous one, even if the milestones themselves are rather arbitrary.

Another milestone set to fall in March is ETF 2,000, the day the U.S. market has 2,000 exchange-traded funds (“ETFs”) and exchange-traded notes (“ETNs”) listed for trading. The ETF 1,000 threshold was crossed on May 7, 2010, with the listing of three new iShares ETFs. The doubling of the count to 2,000, should it occur this month, will have taken a little less than seven years to complete. The next doubling will likely take much longer, as the market is currently saturated with ETFs, including many that are unable to distinguish themselves from the crowd and unlikely to survive.

The 700 ETF closures milestone is a distinct possibility in March, although there probably will not be much of a celebration. As of the end of February, 692 U.S.-listed ETFs and ETNs have previously closed, and two PIMCO ETFs have already announced a March liquidation and closure. Another six will push us to the 700 mark. The 600 ETF closures milestone occurred last July, and its next doubling will likely occur long before another doubling in product quantity.

On the monetary policy front, the Federal Reserve will likely be raising interest rates in March. The next FOMC meeting will conclude two weeks from today, and the Fed has already signaled its intent to hike interest rates three times in calendar year 2017. Despite missing its own predictions of when previous rate hikes were to have taken place the past couple of years, there is little reason to doubt the Fed’s sincerity about raising rates in 2017.

Recent Fed speeches have telegraphed the impending hike with lines such as, “a rate increase is very much on the table for serious consideration,” the case for raising rates “has become a lot more compelling,” and a move might occur “at our upcoming meeting.” Federal Reserve Board Chair Janet Yellen is scheduled to speak in Chicago this Friday, which should either complete the telegraphing operation or put a halt to such speculation.

Late in the month of March, the Bureau of Economic Analysis will publish its GDP and corporate profit figures for the fourth quarter of 2016. It has already released its “second estimate” of fourth-quarter GDP, and that figure shows an annual growth rate of 1.9%. No one seems to be anticipating any large revisions, but the final figure will be important from the standpoint that it will mark the delineation of the Obama economy and the Trump economy.

No investment category can be on the top all of the time. Changes in relative strength dictate that various sectors, factors, and global regions will come into favor and fall out of favor. High Beta and Small Size are current examples of how the once mighty ETF factors have fallen.

Sectors: Nine of the 11 Sector Benchmark ETFs appear to be pulling their weight, while two are clearly lagging. There is a gentle slope of declining momentum scores for the top nine sectors, followed by an abrupt falloff for Telecom and Energy at the bottom. Energy is once again the only category registering negative momentum, and it finds itself deeper in the red this week. There was a notable upward shift among the defensive sectors this week as Health Care moved two spots higher, Utilities shot four places upward, and Consumer Staples climbed a notch. The sectors falling in relative strength that made room for the defensive sector improvement included Industrials, Materials, and Consumer Discretionary.

Factors: Value is the top factor for a second week, but the rest of the relative-strength lineup for our Factor Benchmark ETFs is mostly a jumble compared to a week ago. Quality jumped three spots higher to claim second place, Low Volatility made a volatile surge from ninth to third, Momentum edged into fifth place, Dividend Growth moved three spots higher, and Yield climbed off the bottom. However, the changes with the biggest impact were the factors that fell in relative strength. High Beta was #1 two weeks ago, and Value knocked it out of first place last week. Today, it sits on the bottom—plunging from first to last in the span of just 14 days. Small Size also fell out of favor, dropping from third to eighth. However, even the lowest-ranked factors are posting healthy momentum scores of 20, making this appear to be the start of a factor rotation as opposed to the onset of a bear market.

Global: Latin America posted losses for the week, significantly reducing its margin over second-place China. It did manage to retain its top ranking among the Global Benchmark ETFs, but the short-term negativity will need to reverse if Latin America is to hold on to the top spot much longer. The U.S. climbed from fifth to third, despite posting a momentum decline. It dislodged the developing-markets trio that had been controlling the top by pushing Emerging Markets downs to fifth. Canada was the big mover among the global categories this week, and, unfortunately, it was all to the downside. Canada plunged from sixth to last and relinquished 20 momentum points in the process. A steep drop in its currency, combined with a decline in the Energy and Materials sectors, sent Canada reeling downward. Japan, which has been the basement dweller off and on for the past six weeks, managed to climb two places higher.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“The stock market has gained almost $3 trillion in value since the election on November 8, a record.”

—President Donald J. Trump in his speech to a joint session of Congress on February 28, 2017

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