The ETF Portfolio Strategist: 25 FEB 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The outsized momentum in aggressive asset allocation continues to pay off while relatively defensive strategies fall further behind. It’s no surprise that conservative allocations lag aggressive, at least over the longer haul, but the recent outperformance strikes your editor as unusually high and unsustainable. When, or if, Mr. Market starts to agree is open for debate. Meanwhile, the allure of all-out risk-on continues to make mincemeat of the idea that it’s timely to prepare for turbulence in high-flying risk assets.
The iShares Aggressive Allocation ETF (AOA) set a new record high last week, rising 1.3% (or 1.1% for the trailing 5-day return, which overlooks the US trading holiday on Feb. 18). The gain marks the fifth straight weekly advance.
The increasingly stark contrast between aggressive and conservative portfolio strategies is especially conspicuous in year-to-date results for AOA, which is dramatically outperforming its conservative counterpart (AOK) with a 3.5% rise vs. 0.5%. See this summary for details on the metrics in the tables below.
Although AOK rose 0.7% last week, the ETF is still struggling to decisively break out of its recent trading range, a feat that AOA accomplished in January.
The key headwind for conservative strategies is the ongoing weakness in bonds, which have a substantially higher weight in AOK. The rebound in Treasuries that reversed this year still appears intact despite the modest uptick in iShares 7-10 Year Treasury Bond ETF (IEF).
Meanwhile, green is again dominating the screen for our set of key markets around the world. Notably, stocks in the US (VTI), Japan (EWJ), and Europe (VGK) are currently posting the highest bull Signal scores as of Friday’s close.
The key data to watch in the days ahead for fresh context on the outlook for risk assets: inflation, which has been firmer than expected recently. Not surprisingly, economists are forecasting that the monthly change in core PCE inflation — considered a key indicator for Fed policy — will strengthen in Thursday’s release of consumer and spending numbers (Feb. 29). On the bright side, the year-over-year trend is projected to tick down to 2.8%, inching ever closer to the Fed’s 2.0 target. As a result, there’s still room for debate about the directional bias for inflation in the near term.
Fed funds futures are currently projecting that the Fed will start cutting interest rates at the June 12 FOMC meeting, assigning a roughly 67% probability to the event.
A key factor for reviving this outlook, or not, will be linked to Thursday’s US spending and income report. For the moment, the crowd is hopped up on AI and related news, downplaying the potential for higher-for-longer interest-rate risk. In turn, a contrarian view has been a tough row to hoe this year. The consumer data on tap for Feb. 29 will deliver a fresh stress test for this confidence streak.