The ETF Portfolio Strategist: 20 AUG 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Selling continued to weigh on markets for a third straight week. Our Global Beta 16 strategy index fell again, closing below its 50-day average for the first time in several months. That alone is hardly unusual, but it does highlight the fact that risk assets remain under pressure and it’s getting harder to view the downside bias as short-term noise. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
To be fair, it’s still unclear if the broad trend for markets has again turned decisively bearish, at least by G.B16’s standards. The index’s 50-day average is still well above its 200-day average, which implies that whatever’s weighing on animal spirits it’s not yet obvious that the broad-based rally for G.16 (and its multi-asset-class counterparts) that began late last year has expired. It’s still possible that the setback of late falls into the category of a healthy correction to repair what looked like an “unsustainable” rally as far back as mid-June.
Another way to look at recent events: As long as G.B16’s 50-day average stays above its 200-day counterpart, there’s still a case for arguing that a new bear market for the index isn’t fate. That’s a crude tool, and one that needs more context, including a careful monitoring of how the current risk factors that animate the selling evolve in the remaining days of summer.
Start with interest rates. The recent runup in the benchmark 10-year Treasury yield reflects renewed worries that the competition for stocks is becoming stronger, which will trigger an extended risk-off bias.
“It doesn’t matter whether you think the Fed will or will not carry through with the [hawkish] lean in the Fed minutes,” Stephen Innes, managing partner at SPI Asset Management, told FT.com last week. “The fact is that 10-year yields are soaring and in the modern-day playbook for stock market operators, that is bad news on multiple levels.”
Worries about China’s economy is also taking a bite out of the risk appetite lately too, although this development implies flat to lower interest rates as the country’s disinflationary/deflationary winds pick up speed. Some strategists say that the great boom in the country has ended and that markets are just starting to price in the realities of the global implications.
“We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” Adam Tooze, a Columbia University history professor who studies economic crises, tells The Wall Street Journal.
Deciding what’s next for the broad trend is unusually tricky at the moment, and the renewed sense of flux isn’t likely to be washed away anytime soon. Your editor speculates that the best-case scenario for the near term is for a period of churning in a range.
The rally off of last year’s lows was driven largely by a sense that the selling had gone too far. Having reversed that excess, the crowd is again focusing on other factors—factors that a less binary and therefore open to a wider range of interpretation.
The easy gains are behind us. That doesn’t mean that a new bear market has started, at least not yet. But a period of choppy market action looks more likely until further notice. Deciding what’s on the other side of this churn remains a work in progress.