The ETF Portfolio Strategist: 12 May 2021
Trend Watch
As trend-watching goes, there was only way to cast your gaze today: down. The selling wave left almost no place to hide in risk assets. The catalyst, at least, is no mystery, or so it appears: higher inflation.
Today’s consumer price index was hotter than expected in April. The monthly and year-over-year numbers came in well above expectations, which were already hot relative to March. The annual pace of headline CPI, for instance, surged to 4.2%, the highest since 2008.
The great debate has formally started over whether this is temporary (due to so-called base effects) or something more ominous with a longer-term path. Mr. Market, for now, is erring towards the latter and so is inclined to take cover.
US stocks certainly took a drubbing: Vanguard Total US Stock Market (VTI) fell 2.3% today, pulling the fund below its 50-day moving average for the first time since March 25.
Emerging markets stocks look even worse. Vanguard FTSE EM (VWO) was already shaky in 2021. Today’s sell-everything mentality isn’t helping.
Foreign developed-market stocks (VEA) took a hit too, but compared with US and emerging markets this slice of global equities fared relatively well. Whether the upside technical edge holds is unclear, but for now there’s still a bullish bias in the trend. Maybe that’s because a big slice of VEA (50%-plus) is allocated to Europe, where disinflation and deflation still have the upper hand and so the Continent may be relatively immune from blowback from reflation or worse.
Finding a safe-haven, however, was tough today. The usual go-to safe-room – bonds – was anything but. Vanguard Total US Bond Market (BND) tumbled for a third day. The cumulative selling this week has reversed much of the repair and recovery that’s been bubbling for the past two months.
US real estate investment trusts were no help in today’s rout. Vanguard US Real Estate (VNQ) took a heavy blow in Wednesday’s trading, suffering a 2.5% haircut.
Commodities held up relatively well, as you would expect when everyone’s rushing for the exits on the assumption that the inflation monster is coming. But “pretty well” today is still painted with a shade of red: WisdomTree Continuous Commodity (GCC) — an equally mix of commodities — dropped 1.0%. The fund’s technical profile, however, still looks encouraging.
If you thought inflation-protected Treasuries would be spared during inflation-triggered selloff, think again. After rallying earlier in the day, iShares TIPS Bond (TIP) reversed course and ended with a 0.2% loss. But let’s be fair, that looks a lot better than bonds generally. Although much of the TIPS yield curve is still negative, the reasoning in some corners is that negative real yields will be offset by higher inflation and then some for TIPS, which adjust nominal payouts based on CPI.
In fact, shorter-term TIPS appear to be the star performer today. The iShares 0-5 TIPS Bond ETF (STIP) ticked up 0.1%, holding near a record high. Are we looking at the new market darling for road ahead? ■
