The ETF Portfolio Strategist: 1 Apr 2022
The rebound in US REITs accelerated this week
Commodities take a breather from their recent rally
All but one of our portfolio strategy benchmarks rallied this week
Risk assets continued to rebound this week. The main exceptions: Japan shares and commodities. Otherwise, risk-on made a comeback for the trading week through Friday, April 1, based on our 16-fund opportunity set. For details on the metrics in the table below, see this summary.
Leading the week’s recovery: US-listed real estate investment trusts (REITs). Vanguard US Real Estate (VNQ) jumped 4.0%, marking its third weekly gain (and so far the biggest). The rally left the ETF just a few ticks below its highest close since early January. It could be noise, but it could also be an early sign of recovery that sets the stage for new highs in the weeks ahead. The immediate hurdle: pushing above the record set at the end of 2021. That could be challenging if interest rates continue to push higher and effectively create firmer competition for REITs, which are generally prized for their relatively rich payout rates. But if the ETF can top its previous high, the bullish profile for VNQ will look more convincing. Meantime, put this fund on your short list to monitor.
Another strong performer this week—again: stocks in Latin America. The iShares Latin America 40 (ILF) rose 3.0%, closing above its previous high of nearly a year ago. The upside momentum that’s been driving this energy/commodities-biased ETF shows no sign of slowing.
ILF’s rally is all the more impressive when you consider that commodities took a hit this week. WisdomTree Commodity (GCC) pulled back 3.7%. For now, the slide looks like churning in a range, albeit one that’s more or less holding on to the recent gains. But there are short-term risks, as BMO Capital Markets advises:
History has shown that sharp gains can be swiftly followed by sharp falls. Tail risks to demand are clearly rising, whether geopolitical, financial or simply down to the disruptive impact of inflation on global consumer behavior and confidence in governments, all of which will bear close scrutiny over the coming months.
US stocks extended the recent recovery with a slight 0.2% increase, based on Vanguard US Total Stock Market (VTI). But even after three straight weekly gains, it’s not obvious that equities are set to recover their previous high in the immediate future. VTI’s trend still looks weak and the latest bounce strikes me as rise in an otherwise ongoing correction. Let’s see if my skepticism can survive the week ahead.
“We’ve just seen a very sharp rebound in equities that seems to have caught many by surprise, and which few seem willing to embrace as a potentially persisting trend,” JPMorgan analysts advise in a research note. “From a positioning/flows perspective, it seems the ‘pain trade’ is still higher for now.”
Optimists favoring risk-on may be hoping that this week’s pullback in the 10-year Treasury yield hints at a more favorable conditions for risk-on sentiment in the near term. The benchmark rate eased to 2.38%, the first weekly decline since February. But be careful what you wish for. With inflation elevated and likely to stay elevated for the forseeable future, if not rise further, the Federal Reserve will remain under pressure to lift rates, perhaps dramatically at some point. Markets are starting to worry about policy going too far and triggering a recession, which would solve the inflation problem, albeit at a high cost. A recession would also reverse course for the 10-year rate. In that context, lower rates aren’t likely to inspire an extended run for equity prices in the near term.
Most of our portfolio strategy benchmarks posted gains this week. The one exception: the equally weighted Global Beta 5 EW (G.B5.ew), which holds equal amounts of global stocks, bonds, property shares and commodities. For details on the benchmark designs, see this summary.
Otherwise, sold gains prevailed, although the rally still left G.B5.ew as the only strategy benchmark with a positive year-to-date result, due in no small part linked to the sharp rise in commodities, which retreated this week. ■