The ETF Portfolio Strategist: 07 OCT 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets across the globe continued to slide this week. US stocks (VTI) and equities in Asia ex-Japan (AAXJ) bucked the trend, but just barely.
At the multi-asset-class portfolio level, however, there was no mistaking the downside bias. All four flavors of risk fell again in the week through Friday’s close (Oct. 6), based on BlackRock’s asset allocation ETFs. The year-to-date results are still positive, but the conversative strategy (AOK) is flirting with flipping red for 2023 after recent declines. See this summary for details on the data in the tables below.
The weekly price for aggressive allocation (AOA) fell for a third straight wek and remains below its 10-week average — the weakest profile for the ETF so far this year.
Meanwhile, sentiment continues to take a hit, based on the proxy of aggressive asset allocation (AOA) relative to conservative (AOK). The 10-week average for this ratio is now showing stronger signs of a downside bias. The trend is still up and the strong, persistent bull run via this indicator only recently ended and so there’s still room for debate about whether the turning is noise/consolidation or the start of new, persistent slide.
US shares are the last holdout for keeping weak/bearish Signal scores at bay. VTI is currently at a neutral 0 reading, per the table below — a lone outlier. The rest of the field is posting varying degrees of negative Signal scores.
US stocks may soon join its counterparts, or so the recent slide in VTI implies. Although the fund was able to eke out a small weekly advance — the first rise in 5 weeks — the case is weak for expecting a revival in the recently expired bull run.
A key headwind for stocks is the recent revival in higher interest rates. The 10-year US Treasury yield continued trending up this week, ending on Friday at 4.78%, a new 16-year high for weekly closes. Bonds, as a result, continue to suffer. The iShares 7-10 Year Treasury Bond ETF (IEF) is now testing last year’s support level. A downside breach would signal a higher risk of a new downside run.
The weakening trend in stocks (and the much weaker profile for bonds) speaks volumes for why multi-asset-class strategies are struggling lately. Until there’s more clarity on the path ahead for interest rates, bonds will continue to suffer, which will in turn keep equity investors defensive.
There are some analysts who say the bond market selling has gone too far. That’s a reasonable point, as IEF’s latest slide in terms of price relative to the 200-day average (in z-scores), per the chart below. The case for a jump in IEF (and bond prices generally) looks compelling at some point in the near future. But until there’s confidence that the renewed rise in rates, which started in the summer, has peaked, any bounce in bonds (and by extension stocks) will be skating on thin ice.