The rally in the stock market was derailed by movements in other asset classes in the third quarter. The end of September is a good opportunity for investors to assess their exposure to future shifts in these assets. Oil and currencies were two of the markets which weighed heavily on stocks. Oil prices in the U.S. benchmark West Texas Intermediate crude rose above $90 a barrel during the second half of September. This was up from $70 per barrel at the beginning of July. The dollar index, which measures the greenback’s value against a basket currencies, reached its highest level in the last week of the third-quarter. .DXY1Y mountain In September, the dollar index reached new 2023 highs. The dollar and oil are expected to continue rising as the market moves into October, despite growing concerns over the strength of the U.S. economic and the uncertainty surrounding a possible government shutdown. Oil outlook The increase in oil prices in the third-quarter was due to the fact that the U.S. economic growth continued and Saudi Arabia reduced oil production. According to iShares family of exchange traded funds managed by BlackRock, these factors will continue into the next quarter. “The U.S. Economy, although it may be slowing, will not fall into a recession… within the next three to five months.” Gargi Chaudhuri is the Head of iShares Investment Strategy Americas. He said that the energy market dynamics look positive over the next 3 to 5 months. “The way to play this is in energy equities,” he added. She added that “energy equities aren’t keeping up with the energy rally.” According to the latest iShares Outlook, U.S. Energy (IYE), is a good way to take advantage of higher oil prices. The fund’s total return was more than 10% during the third quarter. However, this still lagged behind the rise in oil prices. IYE YTD Mountain The IYE was able to outperform the S & P500 in the third-quarter, but oil prices were still higher. The Energy Select Sector SPDR Fund, Vanguard Energy Index ETF and FidelityMSCI Energy Index ETF are also major funds that fall into this category. Other Wall Street firms share the optimistic outlook on energy, such as Morgan Stanley analyst Sasikanth Chilukuru who stated in a client note Thursday that after “modest underperformance in 1H” and a decrease in investor expectations, this sector’s outlook has become compelling again. Oil prices could be held back by a weakened global economy, but an increase in supply could also push prices higher. It’s not only about the demand situation. The supply and demand situation is certainly important. Chaudhuri, from iShares, said that if it were just about demand we might have been a bit more cautious. The greenback In the foreign exchange market, the Federal Reserve plan to maintain higher interest rates for longer has given a boost to U.S. dollars, which have strengthened against other currencies. Dollars tend to do well when interest rates in the U.S. are high and global growth is weaker than the American economy. Some funds bet directly on the dollar, such as the Invesco DB US Dollar Index Bullish Fund and WisdomTree Bloomberg U.S. Dollar Bullish Fund. Todd Sohn, ETF Strategist at Strategas, says that these funds are not for everyone. The direction of stocks, bonds and other investments makes investing and trading difficult. It’s hard enough for most people. … Sohn stated that he thought it was enough to try and figure out how the portfolio should be structured in terms of other asset classes. Managed futures ETFs are a way for investors to outsource their currency market decisions. These funds have currency markets exposure in addition to the other asset classes. These funds are also a good choice for portfolio diversification because they have a low correlation with equity markets. The iMGP DBi Managed Futures Strategy ETF, which tracks the movements of hedge funds, rose by more than 4% during the third quarter. Traditional stock and bond funds were mostly down. DBMF 3M Mountain Managed futures fund like DBMF performed better than traditional equity funds during the third quarter. It’s becoming apparent to people that the higher rate regime could last for many decades. Andrew Beer, managing director at DBi, said that this is a huge problem for the wealth management industry which is built on the idea that bonds and stocks are hedged. Beer stated that the DBMF fund only bets on the movements of the euro, yen and dollar against each other. Beer said that the DBMF fund likes to keep things simple. It turns out, adding more currencies doesn’t work over time. … Beer explained that these things tend to move in clusters. Managed future ETFs can add active management to a portfolio, but currency markets remain unpredictable. Sohn explained that it was important to understand the manager’s strategy, and whether they were following an index or an active one. Global stocks. A stronger dollar may also affect international stock funds and areas of the U.S. market that are heavily reliant on other economies. Apple and Nvidia, for example, have been affected by concerns about the Chinese economy at different times over the past few months. Certain sectors are more vulnerable to foreign revenue, and a stronger dollar could be a hindrance to those revenues. As the dollar rose, tech valuations and tech stocks fell. Anastasia Amoroso is the chief investment strategist of iCapital. She said that to a certain extent, this has already been priced in. To reduce the impact of the dollar on your portfolio, you can look for funds with built-in currency hedges. FactSet reports that the iShares currency hedged MSCI Japan ETF has performed better than its unhedged equivalent ( EWJ ), by about 20 percentage points, this year. Look for funds with minimal or no exposure in certain countries which may be at greater risk due to a rising dollar. There’s a need to examine each country’s fundamentals, and the impact of a stronger dollar on them. Amoroso stated that emerging market countries with a current account and fiscal deficit would be most vulnerable.
