The ETF Portfolio Strategist: 10 SEP 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The majority of global markets fell last week, pulling down all of our passively run portfolio strategy benchmarks. The G.B16 Index posted the deepest shade of red, slumping 1.3%. Despite recent weakness, G.B16 is still up a respectable 6.9% year to date and has a moderately bullish 3 Signal score. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
The case for expecting a trading range to prevail for the near term still looks plausible for globally diversified portfolios, in part because the decline from recent highs has been orderly and moderate. There’s no shortage of risk factors swirling, but at this point markets have priced in the known threats. Short of a materially darker turn on the geopolitical and macroeconomic fronts, it’s reasonable to assume that markets will trade in a range or drift modestly lower as a prelude to eventually taking out the previous early-2022 high.
Whatever the future holds, the path ahead will likely be bumpy in the near term as markets struggle to digest the implications of disinflation that may be less robust than central banks prefer while economic activity stays strong enough to sidestep recession.
For the US perspective, Marija Veitmane, a senior multi-asset strategist at State Street Global Markets, accurately summarizes the core debate that will drive market sentiment in the weeks ahead. “I worry that current good economic data are likely to keep inflationary pressures bubbling under the surface,” she advises. “That would keep the Fed and other central banks from cutting rates, which would eventually break the economy.”
Meanwhile, a possible trend change I’m watching may be unfolding in the commodities markets. WisdomTree Enhanced Commodity Strategy Fund (GCC) has been more or less flat-lining for well over a year, which suggests that the worst for the commodities markets are in the rear-view mirror. The ETF is still trading in a range and so it’s premature to assume that an upside breakout is near. But GCC has established a long-running floor while it’s recent momentum bias has skewed positive (see table above). Given that history, a break higher above the 18.5 zone would be a possible sign that the fund will run hot and retest its early 2022 high in due course.
Meanwhile, US Treasuries present the opposite extreme. Despite ongoing chatter about peak rates, the technical profile for the iShares 7-10 Year Treasury Bond (IEF) still looks bearish. The recent slide in the ETF looks set to retest last year’s low in the 91 range. There will likely be a point in the near-term future when the case will be compelling for making a bet on a new bull market for US government bonds, but for now that turning point doesn’t look imminent.