The ETF Portfolio Strategist: 18 Dec 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
News of weaker-than-expected consumer inflation for November was just what stock-market bulls were hoping for. Following the release of CPI data on Tuesday morning (Dec. 13), the S&P 500 Index popped, closing up sharply for the day. But the party was short-lived after the grinch, a.k.a. the Federal Reserve, announced on Wednesday that it still wasn’t in the mood to hand out presents.
Yes, inflation has peaked, or so it appears. But the speed of the slide is still open for the debate and the Fed isn’t taking any chances and so it promises (threatens) to continue raising rates until it’s clear that its inflation-taming project is an irreversible success. By that high standard, there are still more rate hikes on the near-term horizon, a subject that quickly crowded out the upbeat Tuesday’s news on inflation.
"We're going to have to do what's necessary" to lower inflation to the Fed's 2% target, says the New York President John Williams in an interview with Bloomberg on Friday. "We're absolutely committed to get inflation back to our 2% goal, and we're acting in that way." Consumer inflation rose less than forecast in November, offering support for the peak-inflation view. But if the Fed is committed to taming inflation to its target, there's still a long way to go.
The don’t-fight-the-Fed mantra, in other words, revived in the past week, which is to say that the crowd returned to a risk-off mindset. The latest slide in most risk assets reaffirms my ongoing view that staying defensive remains compelling. Until there are clear signs that the terminal rate for Fed funds has arrived, the trend still looks bearish.
At some point markets will bottom, perhaps shown by multiple downswings that retest previous lows. But so far lower lows and lower highs dominate and last week’s broad slide in our 16-fund global opportunity set doesn’t leave much room for arguing to the contrary. For details on the metrics in the table below, see this summary.
The bearish macro implications of ongoing rate hikes are focusing minds, again, on the rising odds that a US recession is near, if it hasn’t already started. At some point that will convince the Fed to cease and desist with policy tightening, but we’re probably still several months at the earliest ahead of that pivot.
The bond market, however, is looking ahead and continues to benefit from the risk-off bias that’s resonating anew. The iShares 7-10 Year Treasury is our top performer for the trading week through Dec. 16, rising 1.0%. The ETF is now trading just below a three-month high. The bounce could be noise, but if incoming economic data continues to weaken, as it did with the latest Weekly Economic Index via the New York Fed, bond prices look set to climb higher.
US stocks, by contrast, appear to be rolling over once more. The Vanguard Total Stock Market ETF (VTI) fell for a second week, slumping 2.0%. The recent rally appears to be at risk of failure, which would be the third time this year that bulls hit a wall. The acid test for deciding if the selling has run out of road is whether the previous low holds. Too soon to know and so I continue to assume that equities remain in a bear market until the trend behavior suggests otherwise.
Not surprisingly, bearish conditions are again conspicuous for our strategy benchmarks: all five lost ground last week and remain in a moderately bearish state. See this summary for design details on the benchmarks. ■