The ETF Portfolio Strategist: 05 MAR 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets are hanging on to the recent rebound in risk assets, but it’s a precarious bounce, thanks in part to expectations that the Federal Reserve will continue to raise interest rates while some measures of US business-cycle risk persist in warning of trouble ahead. Yet stocks appear to be looking through any turbulence ahead and betting that the macro trend is now tilted toward recovery.
There’s no assurance this forecast is correct — markets are always attempting to price in the future, with mixed results in the short term. But for the moment, the crowd remains moderately optimistic. The key question: Will the optimism endure?
Our 16-fund global benchmark — G.B16 — bounced last week, rising 1.9%. The uptrend for the strategy benchmark has been choppy lately and the aggregate Signal score is neutral (see table below). Nonetheless, G.B16 continues to trade well above its recent low.
The next hurdle: closing above its recent high. The attempt earlier this year at breaking through a previous top failed. There may be a third attempt in the offing. If so, the outcome could be decisive for deciding if the recent rally signifies more than noise in a trading range. See this summary for design details on the strategy benchmarks listed below.
All of G.B16’s opportunity set posted gains last week, but the only bullish stand-out at the moment: stocks in Europe. Vanguard FTSE Europe (VGK) rallied 2.5% in the trading week through Friday, Mar. 3. The fund also boasts a strong 5 Signal score — by far the best reading for the G.B16 opportunity set.
Yet VGK’s acid test awaits. The fund continues to trade in a tight range this year.
Meanwhile, US Treasuries (IEF) are tied with foreign government bonds ex-US (BWX) for printing at the deepest level of bearish trending behavior, based on our Signal score. No surprise, then, that the recent rally for IEF continues to show signs of rolling over, due in no small part to renewed chatter from Federal Reserve heads that the central bank intends to keep raising interest rates.
Fed funds futures are still pricing in relatively high odds for 1/4-point hikes at the next three FOMC meetings.
Citing an acceleration of inflation in January “suggests that the disinflation momentum we need is far from certain,” advises Mary Daly, San Francisco Federal Reserve Bank President, in a speech on Saturday. “In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”
Until or if the monetary policy outlook changes, the headwind for bonds also appears to be accelerating… again. ■