The ETF Portfolio Strategist: 27 AUG 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Programming note: The ETF Portfolio Strategist will be on hiatus for the upcoming Labor Day weekend. We’ll return to the usual routine on Sunday, Sep. 10.
Global markets bounced last week, holding out a bit of hope that the recent slide in risk assets may be a garden-variety correction rather than the start of new downtrend that fully reverses the gains posted since the rebound started last October.
Our G.B16 benchmark, comprised of global assets, rose 0.7% for the trading week through Aug. 25 — the first weekly gain in a month. Year to date, the index is holding on to a moderate 6.6% gain. The strongest 2023 return among our benchmarks: a solid 10.0% increase via the Global Market Index (GMI), which passively weights all the major asset classes based on market values. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
The trend for G.B16 continues to show an upside bias, but the crunch point may be near. Another extended run of losses would raise questions about whether the bullish tailwind is still intact on a portfolio strategy level. The main risk for now is the rebound in interest rates. The 10-year Treasury yield (4.25%) pulled back slightly last week, but its recent rise still leaves it near a 15-year high, which is to stay it’s competitive allure vs. stocks is no longer subtle.
Comments from Federal Reserve Chairman Powell didn’t do much to allay concerns. "We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective," he advised on Friday.
Fed funds futures, however, are still expecting no change in rates for the upcoming FOMC meeting on Sep. 20 via an 80% implied probability that the central bank will leaves its target rate at 5.25%-5.0%.
The question, of course: Will inflation continue to cooperate and fade quietly into the night? The main event for new data this week for reassessing: payrolls for August, due on Friday, Sep. 1. The consensus point forecast sees hiring moderating to a 170,000 gain, down from 187,000. That’s more or less a “Golidlocks” scenario: strong enough to keep the economy on a growth path, but soft enough to persuade the Fed to stand pat.
The US stock market (VTI) seems open to the possibility that rate hikes have peaked. Shares posted their first weekly gain in a month. Even the long-suffering Treasury market (IEF) sighed with relief via a token gain in the week just passed.
Let’s see if the markets remain cautiously optimistic about rate hikes in the week ahead. Powell, however, is eager to keep the crowd guessing.
“The economy may not be cooling as expected,” he explained on Friday. “So far this year, GDP [gross domestic product] growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust. In addition, after decelerating sharply over the past 18 months, the housing sector is showing signs of picking back up.”