The ETF Portfolio Strategist: 06 AUG 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Last week’s pullback in markets may or may not signal a new run of trouble ahead, but this much is clear: the rally off of last year’s low was due for a pause.
We’ve been saying as much in recent weeks and the crowd finally agreed. From a US perspective, the news that Fitch Ratings downgraded the US government’s credit rating appears to be a precipitating factor for the selling. But when markets have been as hot as they’ve been recently, any excuse will do to trigger some profit taking.
The latest downturn left no corner untouched. All of our portfolio benchmarks took a hit, including the Global 16 Index, which lost 2.0% last week. That stings, but don’t forget that the benchmark is still up a strong 9.2% for the year, or about double the trailing 5-year return, which implies that it’s too early to rule out more selling to bring the forces of supply and demand closer to equilibrium and squeeze some of the recent excess out of market sentiment. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
Within the G.B16 space red ink was splashed across-the-board. The deepest cut: stocks in Latin America (ILF), which fell 3.7%.
Markets in the week ahead will be navigating some potentially treacherous waters as new US consumer price inflation data is published (Thursday, Aug. 10). The consensus forecast sees the potential for a setback brewing. Headline CPI is expected to rebound a bit to a 3.3% year-over-year pace from June’s 3.0. Relatively mild stuff, but if correct, the pickup will mark the first time in more than a year that headline CPI’s annual rate accelerated.
Core CPI is expected to hold steady at a 4.8%, but that’s still a substantially hotter pace and well above the Fed’s 2% inflation target. Overall, if the crowd’s forecast is correct, markets may face more turbulence as the CPI numbers stoke new concern that the Federal Reserve’s interest-rate hikes may roll on.
Note that Fed funds futures are currently pricing in high odds that last month’s rate hike is the last for this cycle. That may still prove to be the case, but it’s unclear if this week’s CPI data will challenge that view.
“I also expect that additional rate increases will likely be needed to get inflation on a path down to the FOMC’s 2 percent target,” says Federal Reserve Bank Governor Michelle Bowman in a speech on Saturday. “We should remain willing to raise the federal funds rate at a future meeting if the incoming data indicate that progress on inflation has stalled.”
A key question for markets in the days leading up to Thursday’s CPI report: does the hard data support Bowman’s advisory?