The ETF Portfolio Strategist: 21 JAN 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The US stock market (S&P 500) closed at a new record high on Friday, triggering a cascade of comments to the effect that a new bull market is confirmed for American equities. Who are we to argue when the crowd appears overwhelmingly inclined to advise that the the “all-clear” signal has arrived?
But while US shares are now trading in uncharted terrain on the upside, that’s far from a universal condition across asset classes or for multi-asset-class strategies. Consider, for instance, the iShares Aggressive Allocation ETF (AOA), which closed down 0.3% last week at a level that’s modestly below its late-2021 all-time high, the financial equivalent of being a spoilsport at Wall Street’s party.
Meanwhile, the gap between Friday’s close and the previous record high is much wider for the iShares Conservative Allocation ETF (AOK).
The failure of AOA and its counterparts to score new record highs doesn’t mean that US stocks can’t set reach new peaks in the days and weeks ahead. But for asset allocation strategies generally, the outlook is still mixed.
That said, aggressive portfolios reflect strong momentum. AOA’s Signal score is a bullish 5 as of last week’s close, one notch below the highest bullish value possible. Moderate and Conservative allocations, however, have weaker albeit still modestly bullish scores. See this summary for details on the metrics in the tables below.
A key headwind for asset allocation strategies is bonds, which are nowhere near record highs. In fact, it’s not yet obvious that the bear market in US Treasuries has ended, much less reversed. The iShares 7-10 Year Treasury Bond ETF (IEF), for example, is trading far below it’s previous peak and arguably continues to be caught in a downtrend.
Momentum for global markets generally is still a mixed bag. US stocks (VTI) are obviously red-hot. Ditto for equities in Japan, where stocks have posted a strong run in recent months and look close to taking out its previous high, based on iShares Japan (EWJ).
At the opposite spectrum, commodities (GCC), Africa stocks (AFK) and shares in Asia ex-Japan (AAXJ) are clearly suffering. Meanwhile, most of the rest of the field is in varying states of meh.
Animal spirits from a multi-asset-class portfolio perspective, in short, appear overly reliant on US stocks. That leads to the question of whether American shares will continue to do the heavy lifting in generating relatively upbeat numbers for asset allocation strategies? Another way of asking the same question: Will the S&P still compensate, and then some, for the failings in bonds and elsewhere?
The next several weeks will provide a stress test on that front. Markets will be closely watch to see if the S&P will hold on to its record-setting gains. The news flow on several fronts could be (will be?) problematic, but keep in mind that your editor’s cautious outlook has been dead wrong so far, at least when it comes to US stocks.
As for whether caution still resonates for managing expectations for global multi-asset-class strategies, well, let’s just say that the jury’s still out.