The ETF Portfolio Strategist: 27 Aug 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
The pivot is dead. Long live the pivot.
The markets reacted to Federal Reserve Chairman Jerome Powell’s latest warning and abandoned the notion that a pivot away from rate hikes was brewing in the near term. A pivot will come, eventually, but not anytime soon, dealing a blow to expectations that a kinder, gentler Fed was emerging after months of hawkish policy decisions.
“Reducing inflation is likely to require a sustained period of below-trend growth,” Powell affirmed at the Jackson Hole economic policy symposium on Friday. “While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”
Markets quickly required a larger discount to adjust for the revived perception that ongoing policy tightening remained the path ahead. For the week overall, our global 16-fund opportunity set took another beating, albeit with some exceptions.
A notable outlier in last week’s wave of red ink: stocks in Latin America (ILF). The iShares Latin America 40 ETF rose 2.7% for the week and is holding on to its recent rebound from a year-and-a-half low. ILF’s strength has earned it a bullish +4 for our proprietary Signal score (see table above). The upbeat momentum profile suggests there’s a calculated risk for expecting the ETF to hold its ground and perhaps move higher in the days and weeks ahead. (For details on the methodology, see this summary).
Note, too, that a broad measure of commodities (GCC) has been firming up lately, suggesting that the recent correction has ended. On a relative basis vs. the rest of the field (second only to ILF), the WisdomTree Commodity Index ETF has an upbeat Signal score of +2. That still leaves room for debate, but in the current environment GCC’s recent stability and modest uptrend certainly stand out.
Otherwise, the trends for the rest of the field continue to reflect middling to weak bearish Score profiles. That includes US stocks (VTI), with a moderately bearish outlook. Following a summer rally, Vanguard Total US Stock Market has retreated for a second week. For the moment, the best-case scenario appears to be churning in a range until the markets further sort out the implications of ongoing rate hikes, high inflation and slowing economic growth.
Whatever the crowd assumed (or didn’t) in recent days, one key variable has been constant: a clear expectation that the Fed remains set to raise interest rates again at the next FOMC policy meeting on Sep. 21. Fed funds futures have continually priced in high odds for another round of tightening. The only question was whether the hike would be 50 or 75 basis points. The current estimate leans moderately toward the latter.
Treasuries have been signaling more rate hikes for several weeks, based on the recent downturn in iShares 7-10 Year Treasury Bond (IEF) after a modest rally in June and July.
The return of dark shadows across most global markets has taken a fresh bite out of our portfolio strategy benchmarks (see this summary for design details).
All five posted losses last week and all reflect moderately bearish Score readings. In the waning days of August, markets overall are telling us to manage expectations down for the near term. ■