The ETF Portfolio Strategist: 21 MAY 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets continue to flirt with a risk-on posture despite several hazards lurking in the background. Using our G.B16 strategy benchmark as a proxy for sentiment suggests that the crowd is chomping at the bit to let the bulls run wild yet still unwilling to fully embrace the attitude adjustment.
The G.B16 index closed up 0.4% last week, trading near its recent high and well above the 200-day moving average. Markets, in sum, are generally holding on to their rallies off of last year’s low but are struggling to find the mojo to rise decisively above recent highs. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
The immediate headwind is the ongoing US debt-ceiling deadlock. Reports in recent days of talks between President Biden and House Speaker McCarthy have waxed and waned between hope and fear as precarious negotiations stumble, recover and then stumble again. There’s still a vague aura of hope that Democrats and Republicans will find enough common ground to raise the ceiling and sidestep a US default in the days ahead. Markets are leaning toward that view, but appear reluctant to assume a timely political solution is imminent.
The US stock market appears to be assuming that a political resolution is near. Vanguard Total US Stock Market (VTI) rallied 1.7% last week and is close to taking out its previous high. The political machinations in the week ahead may be the deciding factor on what comes next for equities.
Bond investors, meanwhile, are having second thoughts about feelin’ groovy. US Treasuries suffered their biggest weekly decline of the year as several familiar risk factors weighed on sentiment. Anxiety about the prospects for a default on US government bonds conspired with renewed concern that Federal Reserve rate hikes may not quite be dead yet. As a result, the iShares 7-10 Year Treasury Bond ETF (IEF) took a 1.9% haircut last week.
“Markets are trying to look beyond the debt ceiling and to the economy, inflation and how it influences the Fed,” says Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Is it a pause and then a hike again, or do they eventually cut? My bias is to wait it out. But there is a fine line between being patient and wrong.” ■