The ETF Portfolio Strategist: 14 JAN 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets continued to flirt with record highs last week, but remain reluctant to breach the previous peaks. The iShares Aggressive Asset Allocation ETF (AOA), a global proxy for the major asset classes rebounded 1.3% for the trading week through Friday’s close (Jan. 12), more than reversing the previous week’s loss. But for now, the trend appears on hold as the crowd reassess various risks (some old, some new) that continue to swirl.
The good news is that the bullish bias that’s been in force for various risk flavors of global asset allocation continue to post strong scores favoring an upside bias via the Signal score in the table below. See this summary for details on the metrics in the tables below.
Nearly half of our list of major market slices are also showing strong momentum readings. The downside outlier exception (still): commodities (GCC).
The usual suspects are probably giving the bulls second thoughts, or at least reason to put animal spirits into neutral. The Israel-Gaza conflict is turning into a regional Middle East war following Thursday and Friday’s airstrikes by the US and allies on Yemen’s Houthi rebels, who’ve been attacking international shipping in the Red Sea. Meanwhile, all eyes are watching to see if the relatively low-intensity fighting on the Lebanon-Israel border of late turns into a wider battle.
For now, the blowback for the global economy has remained relatively muted, but the containment is precarious and is evolving on a day-to-day basis.
There’s also a new dynamic to consider on the world stage: the third straight presidential victory on Saturday in Taiwan for the ruling Democratic Progressive Party (DPP). The results are effectively a snub to China, which warned against re-electing the DPP, which favors independence over Beijing’s goal of reuniting with the island state. China wasted no time in issuing fresh warnings to Washington after US Secretary of State Antony Blinken congratulated Taiwanese president-elect William Lai.
There’s also the familiar list of macro risk factors lurking, including fresh questions about whether the recent slide in inflation is slowing to an extent that convinces the Federal Reserve to delay the widely-forecast rate cuts. Fed funds futures are pricing in an 81% probability for a cut at the March 20 FOMC meeting. The key question for the week ahead: Will this confidence fade during a busy week of US economic updates?
The US economy remains resilient, and so news scheduled for Tuesday (Jan. 15) that retail spending accelerated, per the consensus forecast, could eat away at confidence that rate cuts are near. As the Financial Times notes: “A top Federal Reserve official has said inflation could ‘see-saw’ if policymakers cut rates too soon, warning that the descent towards the central bank’s 2 per cent goal was likely to slow in the months ahead.”
Part of the reasoning for markets to turn cautious for the immediate future is linked to the fact that prices for several key risk assets at bumping up against record highs. The margin for error and negative surprises, in other words, is low.
Consider US equities (S&P 500), which ended last week at just slightly below an all-time high. Recent momentum suggests there’s enough fuel left in the tank to drive this index into uncharted heights. But geopolitical concerns and other macro uncertainties may persuade the crowd to proceed cautiously for the near term. The confluence of what may turn out to be rapidly escalating geopolitical risks and record highs is probably enough to keep the bulls in a holding pattern until further notice.