The ETF Portfolio Strategist: 07 JAN 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
So close you can almost taste it. But no cigars… yet.
Global markets eased last week, denying a number of key benchmarks from reaching record highs, including the iShares Aggressive Asset Allocation ETF (AOA), which fell 1.5% in the trading week through Friday’s close (Jan. 5).
Given the strong rally over the past two months, it’s no surprising that AOA has finally stalled. Is it coincidence that the rally hit a wall just below the Jan. 2022 all-time high? Perhaps not. Markets tend to hit turbulence around milestones. The question is whether last week’s pullback is a healthy round of consolidation before the bulls push prices into new record-high terrain? Alternatively, the latest decline may be fresh evidence that a trading range still prevails—a view that’s been my pet theory on these pages for months.
Trend data, however, suggests the opposite and that markets will soon break out to new highs. The Signal scores for all the iShares asset allocation ETFs continue to post moderately bullish readings, albeit less so compared to when I signed off for the year in mid-December. But for the moment, momentum looks persuasively bullish and so an objective review of recent history leaves plenty of room to expect that AOA and its counterparts will take previous records at some point in the near future. See this summary for details on the data in the tables below.
Reviewing the profiles for the primary components of global markets paints a far more mixed picture. Equities are driving animal spirits, but there the party is weaker elsewhere, particularly in commodities (GCC), which continue to reflect a moderately bearish signal.
For good or ill, markets are at a crossroad and so the next several weeks could be critical for assessing what comes next, for good or ill. A good time to reassess expectations.
Whether you’re bullish or bearish it’s prudent at this juncture to refresh the assumptions that inform your asset allocation. There’s no shortage of risk factors to consider, including:
low but-still rumbling recession risk
new concerns that forecasts that a Fed rate cut is near may be premature
ongoing geopolitical risks that continually threaten to spread, ranging from the Israel-Gaza war, Ukraine war and US-China tensions
the US election in November and the potential for political turbulence that spills out into the real economy. More immediately, the US is again facing a possible government shutdown later this month.
Markets have generally been non-plussed by these and other risks, which supports the bullish case for more of the same in the months ahead. But every trend ends at some point. Whether we’re at that point, or not, is unclear as always in real time.
On the flip side, the rally over the past two months, which extends the preceding bounce off the Oct. 2022 low, leave markets with substantially less room for error and negative surprises/shocks. In other words, a lot has to keep going right to keep the party going. That’s usually true, but the stakes are quite a bit higher when markets are bumping up against record highs.