The ETF Portfolio Strategist: 15 OCT 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Global markets stabilized last week, providing a lift to prices for the four iShares asset allocation ETFs used as portfolio benchmarks on these pages. The respite is a welcome change after a run of losses, but the downside bias remains intact.
Three of the asset allocation ETFs reflect modestly bearish trend profiles as of Friday’s close while the conservative fund (AOA), last week’s return leader, switched to a mildly positive trend Score. See this summary for details on the data in the tables below.
Blowback from the Israel-Gaza conflict on markets has, so far, been limited for global financial markets. That may change if the fighting spreads and turns into a wider conflagration that draws the US and other nations into the fighting. That appears to be a relatively low risk at the moment, but the calculus could quickly change in the days ahead given the fluid conditions. Indeed, the US is sending a second aircraft carrier strike group to the eastern Mediterranean to support Israel.
Meanwhile, the fighting between Israel and Lebanese militant group Hezbollah is a second front that threatens a wider war. “Hamas is but the weak underling of Hezbollah, a much more formidable fighting force and widely recognized as the most powerful nonstate military in the world,” advises Firas Maksad, a senior fellow at the Middle East Institute. “This will be a game-changer, not only for Israel, but also for the entire region” if this theater of conflict intensifies in the days ahead.
The slightly firmer reading for the conversative allocation fund (AOK) stands out in the table above, but the rebounds falls well short of a clear break with the recent weakness. Even putting the uncertainty of the Israel-Gaza conflict aside, the risk climate still doesn’t inspire confidence that a new bull run is brewing. As I’ve been discussing recently, the case for a relatively defensive posture remains compelling. My guesstimate for the near-term outlook for markets: a flat-to-modest-downside bias for globally diversified portfolios.
Reviewing the main components of financial markets shows broad-based gains last week, led by shares in Africa stocks (AFK) and commodities (GCC). The main losers: US small-cap shares (IJR) and property stocks ex-US (VNQI).
Notably, commodities (GCC) remain the upside outlier in terms of our Signal score, which is currently a moderately bullish +3. But caution is still recommended here. The Israel-Gaza conflict, along with the ongoing Ukraine-Russia war, could drive commodities prices higher — energy in particular as the winter approaches. But higher commodity prices could weaken global economic activity, in part by driving inflation higher, which in turn persuades the Federal Reserve and other central banks to maintain hawkish monetary policies, which further weighs on economic activity. The tactical case for commodity-price spikes may be attractive for traders, but I have my doubts that current conditions look compelling for strategic-minded investors.
Finally, a growing number of analysts say that the recent rise in bond yields makes the asset class attractive. Agreed, but keep in mind that the price trend remains bearish. No one can exactly time the bottom, but our Treasury proxy — iShares 7-10 Year Treasury Bond ETF (IEF) — looks set to test new lows. The deeply bearish Signal score of -4 doesn’t help. Modestly raising bond allocations has appeal, especially for portfolios with substantially below-target fixed-income weights. But it’s still premature to ring the all-clear bell in this corner.