The ETF Portfolio Strategist: 17 Sep 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Respect the trend. Price setting in markets may be inefficient, it may be incongruous at times, but it’s never “wrong” in the sense that success and failure in money management is ultimately determined with buy and sell prices.
So, respect the trend. The challenge is that the trend isn’t always clear, in part because no one knows how the trend will unfold in the future. But some trends, perhaps most, once firmly established, tend to play out as expected. As a result, making calculated risks based on implied probabilities via trends has merit as a general proposition.
And, yes, sometimes a trend is MIA — think trading range. In other words, there are periods when you should simply wait.
That brings us to the present situation, when the trend continues to suggest that a risk-off bias remains in force. We can’t prove and it could turn out to be blatantly wrong in the days/weeks ahead. But the probability seems to lean more than slightly in favor of risk-off for several key markets.
Consider the Signal scores, which summarize our proprietary momentum analytics. The latest round of price deterioration has left nearly every slice of our 16-fund global opportunity set deep in negative-bias terrain. For details on the methodology, see this summary.
Case in point: US stocks (VTI). There’s plenty of noise embedded with the signal — as usual. But there’s a discernable slide and it’s not yet obvious that it’s played out.
The trend is clearer in the US Treasuries market (IEF). The implied message: it’s too early to call a bottom. All the more so now that IEF appears to be pushing below its previous base.
The key risk factor — or certainly one that’s on the short list — is the Federal Reserve’s ongoing tightening of the policy screws, with another set for Wednesday (Sep. 21), when the FOMC is widely expected to announce a fresh installment of a 75-basis-points rate hike.
Have the markets fully priced in future interest-rate hikes? Probably not since it’s not clear how long and how far the Federal Reserve will continue to actively and hawkishly fight the inflation demon. That’s a function of ongoing mixed messages from inflation. In the latest release for August, headline consumer inflation inched lower on a year-over-year basis but the decline was softer than expected. Meanwhile, core CPI edged higher. The optimistic view is that inflation has peaked, but the slide from the peak so far has been gradual. Bottom line: inflation at ~8% for headline CPI remains far above the Fed’s 2% target. With the central bank’s credibility in the crosshairs, the odds are low that a pivot in policy is near. The central bank can’t afford to lose this one.
Market trends are pricing in that narrative, which leads us back to our rhetorical entry: Respect the trend.
No less applies to our portfolio strategy benchmarks, which are now at maximum bearish Signal scores across the board. Respect the trend. ■