The ETF Portfolio Strategist: 09 FEB 2025

Trend Watch: Global Markets & Portfolio Strategy Benchmarks

The attitude adjustment on steroids that is being engineered from the Trump White House has unleashed a blur of change, revision and, in some cases, wholesale trashing of policies and protocols on multiple fronts. The whirlwind has left some enthused and others dizzy and disillusioned. But if this is bad news for markets, it’s not showing up in the data to date. Investor sentiment is still skewing positive.

Exhibit A is our usual set of global asset allocation funds, which rebounded last week, closing near record highs. Following a strong run in 2024, all four ETFs are posting solid gains so far in 2025, led by a 2.6% rise for the aggressive strategy (AOA). Meanwhile, our proprietary Signal score indicates a strong bullish trend at last week’s close. See this summary for details on the metrics in the tables below.

The recent strength in markets (and the recovery from the late-2024 turbulence) is profiled in the Global Trend Indicator (GTI), which summarizes the technical states for each of the four ETFs listed above. Although news headlines and various strains of behavioral risk provide incentives to adopt a defensive stance, upside momentum in broad terms for markets suggests otherwise.

Another measure of broad market risk is also signaling a strong upside momentum condition at the moment, based on the GTI Drawdown Risk Index, which quantifies the current strength of bullish trend activity for GTI. This risk index continues to stick close to a 0 reading, indicating a nil level of signficant drawdown risk for the immediate future.

The past, of course, is always obvious while the future is forever uncertain. But to the extent that we can model recent history, and take a degree of comfort in the historical record that shows a given trend tends to roll on, a bullish bias remains in force and suggests going with the flow.

Ditto for taking a closer look at global markets. As the table below indicates, the trend is positive and robust in most slices of global markets.

The burning question is whether a timely contrarian call is worthwhile despite the positive trend of late? The news headlines offer a rich trove of incentives for adopting a cautious if not bearish stance. From President Trump’s plans for tariffs (currently on a temporary pause) to sticky inflation (which has halted rate cuts and may lead to a rate hike) to various geopolitical risks linked to Russia and China, it’s easy to anticipate trouble around the next bend.

Yet markets writ large remain immune to these concerns, which raises the question: What do markets know that I don’t? Speaking for myself, the answer is obvious: a lot. That doesn’t mean the market’s always right (it’s not), but it’s more often right than my behavioral instincts.

All the concerns, threats, and slow-burning crises that you can list are already priced into markets. The real question is whether the expected risk premium that markets are currently offering is fair compensation? Minds will differ on this crucial point, as they always do. But as a baseline, it’s usually best to begin on the assumption that the market’s generally right. From there we can adjust expectations to match the particular needs and expectations that inform each investor’s unique situation.

Digging into various valuation metrics, for instance, opens another door for adopting a relatively cautious stance. Take US equities: The CAPE Ratio, a popular valuation metric, suggests stocks are highly valued at a level that’s only been exceeded twice in the past 150 years. That’s a warning sign, but it’s not necessarily a useful timing indicator. The CAPE is telling us that expected returns have fallen sharply in recent history.

The S&P 500 Index’s earnings yield is telling a similar story. The market’s current 3.32% payout rate at the moment is well below the 4.49% risk-free yield on a 10-year Treasury Note (“risk free” in the sense that buying and holding at the current yield locks in that rate through maturity).

These are not irrelevant metrics, but they should inform our asset allocation decisions rather than trying to “time” the market proper.

Keep in mind, too, that while it’s almost certainly true that equities’ ex ante return has faded recently, a prudent model for projecting performance should consider the investor-sentiment factor, such as expectations for change in valuation. This is a tricky variable because modeling what the crowd may “feel” in the future requires oracular powers in the extreme.

Nonetheless, one strain of optimism intuits that Trump 2.0 will usher in a golden age for the corporate profits and the economy — an outlook that will keep animal spirits bubbly.

Let’s not discount that possibility, in part because risk assets (US stocks in particular) still appear on board with the idea (despite the recent if modest run of turbulence). Yet mindlessly embracing the idea as the gospel truth is going too far.

A key variable for how any given investor should about risk management starts with time horizon. A 25-year-old investor with decades to go can afford to look through current concerns, whereas a retired investor currently relying on a “safe” withdrawal rate from cannot.

Another key variable is becoming intimate with your unique spin on “risk,” and how to manage it. This a multi-dimensional topic and far beyond the scope of the discussion here. But here’s a though on a first step for thinking about your personalized relationship with risk. Ask yourself a simple question: Would you prefer to be early or late in the next major correction (bear market)? Since we can’t reasonably expect to call the next top perfectly, we’re left with those two lesser choices.

Each has its own set of pros and cons and so it’s important to think through this issue carefully. There is no “right” or “wrong” answer, but getting comfortable with how you think about your answer, and understanding the implications, goes a long way in framing how you should act today.

Meanwhile, Mr. Market speaks loud and clear on current expectations: the party continues. The obvious caveat: Mr. Market’s time horizon is infinite whereas it’s finite for the rest of us. ■