The ETF Portfolio Strategist: 24 SEP 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Global markets were on the defensive last week as a variety of risk factors convinced the crowd to err on the side of caution. All four of BlackRock’s suite of asset allocation ETFs fell in the trading week, although solid if fading year-to-date gains remain intact. Note: starting with this issue, the strategy benchmarks will focu on a quartet of iShares ETFs that span a range of risk profiles for global multi-asset-class portfolios.
Note that all four asset allocation ETFs are posting modestly bearish momentum scores via the Signal column in the table above. These profiles are warnings that the recent recovery in in risk assets, which began 11 months ago, is in danger of rolling. To date, the recent pullback was moderate and appeared to be a garden variety consolidation after a length and unsustainable runup in markets. But in the wake of last week’s sharp decline in AOA, the potential for an extended, relatively deep slide looks a bit more plausible. See this summary for the trend signals in the tables above and below.
In the days and weeks ahead, I’ll be looking to see if AOA and hold up its 40-week moving average. Corroborating evidence will be comparing how the Signal Score in the table above fares.
The conservative asset allocation strategy (AOK) is looking somewhat worse by comparison. In addition to posting a slightly more bearish Signal Score vs. AOA, the conservative portfolio’s technical profile is weaker. In particular, AOK’s weekly price fell below its 40-week average. The implication: the fund’s price support at roughly 34-plus looks like it’s ready to give way.
Looking at the major components of global markets via our G.B16 list of proxies doesn’t look encouraging either. After every slice lost ground last week, nearly all markets are posting varying degrees of a downside biases. The main outlier, still, is commodities (GCC).
As noted in recent weeks, GCC’s momentum profile has been perking up. It’s still open for debate if the recent rally signals a new upside breakout. For the moment, the ETF has rallied to the upper level of its recent trading range, but it remains to be seen if it can decisively break through this ceiling, roughly at the 18.5 level. If the crowd pushes the fund through that line, it may signal an extended run higher.
Meanwhile, the elephant in the room is whether the US government will shut down on Oct. 1. That’s looking increasingly likely as turmoil persists in the Republican party in the House of Representatives. Without going too deeply into the weeds, the critical question this week: Can House Speaker Kevin McCarthy unite his fellow Republicans to pass legislation to keep the government running? If not, will he look across the aisle to Democrats to find the votes to pass the budget?
The answers to these questions in the days ahead will determine if a shutdown will be averted. If not, a modest hit to US economic activity is at stake. "A government-wide shutdown would directly reduce growth by around 0.15 [percentage points] for each week it lasted; including modest private sector effects, the hit to growth could be around 0.2 [percentage points] per week. In the quarter following reopening, growth would rise by the same amount," according to a recent estimate by Goldman Sachs.
The question for the financial markets is how to estimate the blowback if Washington dysfunction slips over the edge? The safe assumption for now: sell first and ask questions later.