The ETF Portfolio Strategist: 10 DEC 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Is the rally in risk assets off the October low stalling? It did last week, based on a set of asset allocation ETFs. Our usual lineup of funds were flat or closed slightly lower in the trading week through Friday, Dec. 8, 2023. See this summary for details on the data in the tables below.
To be fair, it’s too early to pull the plug on the view that markets remain on track to extend their recoveries and post new highs in the near term. By some accounts, markets are merely consolidating recent gains as a prelude to higher prices in 2024.
By contrast, your editor continues to expect that a trading range will prevail and that new record highs are well beyond the near-term horizon.
Both scenarios are plausible. Deciding which one will emerge victorious will take several weeks at the least. Meantime, let’s review where we stand and consider some of the factors that may play key roles in deciding which view will triumph.
Start with the recent path for iShares Aggressive Allocation ETF (AOA), which ticked lower last week. The fund is trading just below its summer high. If AOA can take out the August peak, the bulls will have a new excuse to celebrate, but the festivities will be short-lived until markets scale the late-2021 record peak.
The recent upside bias looks a bit stronger for certain markets. US stocks (VTI), for instance, took out the summer highs last week, although an attempt at reaching the all-time peak will probably have to wait until well into 2024’s first quarter.
Meanwhile, what will keep sentiment bullish in 2024?
The answer will almost certainly be heavily influenced by central bank policy, which receives a critical update this week when the Federal Reserve announces its new policy review and publishes a fresh round of economic forecasts (Wed., Dec. 13). Fed funds futures are currently pricing in estimates of a near-certainty that the current 5.25%-to-5.50% target-rate range will be left as is. The key date for a possible change is the March 20 FOMC meeting — the market estimates a toss-up between holding rates steady or cutting.
Geopolitical events will likely play an influential role in the year as well. For now, markets look convinced that the Israel-Gaza war will not spread into a regional conflict. Indeed, a key indicator on that front — oil prices — is strikingly unthreatening of late. The US benchmark ended the trading week at roughly $71 a barrel, far below the previous $90 peak of late-September.
Meanwhile, the Ukraine-Russia war grinds on, but its relevance for markets continues to fade. Although the conflict remains a tragedy for Ukraine, a serious threat for Europe in the longer run, and black eye for US influence from a NATO perspective, the shifting political tide in the West (particularly in Washington) re: extending/deepening military support for Ukraine implies that markets will increasingly view this conflict as a contained regional event with minimal relevance for most markets.
The key risk factor to monitor is next year’s US election. Although it’s still too far ahead to make high-confidence forecasts, Donald Trump’s ongoing strength — for the GOP primary and the general election in November — is a reminder that the potential for radical changes in US policy is non-zero probability. Exactly what that means is open for debate, but this much is clear: the status quo, on numerous fronts, is vulnerable.
The bottom line: markets will increasingly focus on US election-related risk in 2024. That’s a not-insignificant reason why your editor continues to expect that markets will stay in a trading range for the foreseeable future and that new record highs for multi-asset-class strategies lie further ahead than recent market activity implies.