The ETF Portfolio Strategist: 07 JUN 2026
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Inflation worries weighed on markets last week. Not exactly news at this late date, but the better‑than‑expected US payrolls data for May highlighted that the world’s biggest economy remains resilient in the face of an energy crisis. Treasury yields, unsurprisingly, rose as investors sharpened their focus on the possibility that inflation risk may linger longer than recently expected, supported by a relatively robust economy, which in turn lifts the odds that the Federal Reserve may soon start raising interest rates.
No one should dismiss these concerns, but it’s still early for strategic‑minded investors to assume the worst‑case scenario is baked in. By some measures, a pullback was overdue. The S&P 500 Index had rallied for nine straight weeks, a relatively rare event with only ten prior occurrences to the latest run‑up, according to The Motley Fool. The odds for a pause were high even before Friday’s surprisingly strong jobs report.
Global asset‑allocation strategies suffered on Friday as well. All of our proxy ETFs fell sharply last week. The aggressive strategy (AOA) was especially hard hit, slumping 2.3%.
The recent rally looked a bit excessive even before the jobs report. The Global Trend Indicator (GTI), which summarizes the technical profiles of the ETFs above, has been on a tear lately. As I commented two weeks ago, “GTI’s vertical ascent of late is startling and almost certainly unsustainable.”
Despite the latest pullback, Friday’s downturn barely puts a dent in the bullish trend. Yes, this could be the start of trouble, but these are still early days for deciding if whether what just happened is noise or signal.
GTI’s drawdown is still a garden-variety -1.2%, a peak-to-trough decline that occurs with a frequency nearly on par with social-media commentary from the White House.
Note, however, that the valuation concern I pointed out in late-May, while slightly less onerous now, is still elevated and so further selling to reduce the froth is a reasonable bet.
None of this persuades me to head for the exits in any meaningful extent. I’ll be more concerned if the short-term trend signal for the aggressive asset allocation strategy (AOA) flips to risk-off — one of my technical canaries in the coal mine for monitoring risk.
A granular review of markets last week shines a spotlight on the widespread selling, led by Asia ex-Japan equities (AAXJ), which dropped nearly 6%. But with positive trends still dominating (green on the screen) for our proprietary indicators, I’m still considering whether Friday’s selling is a sign of things to come.
Two markets that could change my expectations for risk: Treasury yields and oil. As I’ve been discussing recently, these two markets are critical for assessing the risk outlook right now. The spike in the 10-year yield in late-May looked worrisome when the benchmark rate traded just below 4.70%—the highest in about a year-and-a-half. The sharp pullback since then has eased my concern, but the yield jumped on Friday to 4.52%. The trend is still up, and so yields could become a significantly bigger headwind for risk assets in the days and weeks ahead.
The policy-sensitive 2-year yield is particularly worrisome. In Friday’s trading, this maturity jumped to 4.15%, the highest close in over a year and a clear sign that the bond market in increasingly pricing in higher odds that the Fed will lift its target rate, which is still at a 3.50%-to-3.75% range — well below the 2-year yield.
Fed funds futures are still pricing in high odds that the Fed will leave rates unchanged at the upcoming June 17 policy meeting, which will mark Kevin Warsh’s public debut at the central bank’s press conference. As I wrote last week, the meeting is a must-see event because it will reveal “How he defends that preference under the glare of a live press conference will offer the first real clue about the kind of Fed chair he intends to be.”
A related, critical piece of the macro analysis is the price of oil, which has been holding in a range. Uncertainty about when the Strait of Hormuz will reopen and facilitate normal flows of energy exports—and reduce headline inflation pressure— is the burning question. Unfortunately, the status quo still looks like the path of least resistance for the near term. That’s (still) a troubling scenario, but as Christopher Smart, a trade adviser and Treasury official in the Obama administration, opines: “With every passing day, the world is learning to live without the Gulf’s seaborne exports.”
Just as the Covid-19 pandemic and President Trump’s tariffs forced a significant rewiring of global supply chains, the Strait’s closure has prompted a similar adjustment. You might be part of it. When gas prices rise rapidly, people start to limit their driving. Walmart just reported that customers are now buying less than 10 gallons of gas at a time on average at its filling stations.
The central question: Is the blowback from the energy crisis on track to worsen, lessen, or roughly remain the same? The answer will weigh heavily on the outlook for inflation and economic growth. Among the metrics I continue to watch closely for insight on this front: the US crude oil benchmark (West Texas Intermediate). At around $90 a barrel at Friday’s close. That’s a middling range, and supports Smart’s view that the crowd is “learning to live” with the Middle East crisis. All bets are off, however, if WTI retests its upper range or (even worse) breaks to the upside and trades decisively over $120.
How all this plays out is anyone’s guess. For mere mortals, the priority is watch the numbers closely for signs of significant downside changes in market sentiment. Inflation data tops the list for incoming data, starting with tomorrow’s update on US consumer inflation expectations via the NY Fed’s survey for May (Mon., June 8).
The main event comes later in the week, when the government publishes US consumer inflation data for May (Wed., June 10). The consensus forecast calls for the year-over-year change in headline CPI to top 4% for the first time in over three years. The relatively stable forecast for core CPI at 2.9% will help dial down the worst-case fears.
The Cleveland Fed’s inflation nowcast suggests that a jump in the annual trend for headline CPI will be the peak, while core CPI holds steady.
Encouraging, but that’s assuming this week’s data cooperates and the shaky ceasefire in the Gulf holds. As the latest attacks remind, confidence on this front is still a day-to-day affair. ■