The ETF Portfolio Strategist: 27 Nov 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Markets continue to show signs of recovery. It’s still debatable if this is bear-market noise or the start of a sustainable rebound. Only time will tell, but the trading week kicks off with some encouraging numbers to consider.
Notably, there’s more green on the screen for our Signal indicator via the table below, which profiles our 16-fund global opportunity set. For details on the Signal methodology in the table below, see this summary. It’s still early to assume that the worst has passed, but markets are again revisiting the possibility.
A key test is whether the bullish Signal scores (indicated by the green boxes) will show staying power. Note that green has appeared several times in recent history only to fade after a few weeks. Is this time different? Unclear, but if the bullish Signal readings persist into December it may be time to revise our cautious outlook.
Last week’s top performer for the G.B16 fund set: iShares Japan (EWJ), which extended its recent rally with a a 3.2% gain. The pop lifted the ETF to its highest close in over three months.
US stocks (VTI) also rose last week. But the trend still looks bearish. Perhaps the next couple of weeks still show a clear break with the downside trend that’s prevailed so far in 2022, but it’s still premature to make that call until/if VTI can close above ~205 and, more importantly, hold its ground if not rally further.
The fuel that’s igniting the revival of bullish spirits is the view that the Federal Reserve’s interest rate hikes are now on a path to soften. That’s based on the forecast that the central bank will downshift its policy tightening to a 50-basis-points hike at the next FOMC meeting (Dec. 14) from the 75-basis-points increases so far. Even if that’s true, the brunt of the rate hikes to date (and the expectation of more to come) have yet to fully impact the economy and so there’s still room for debate about the macro risks that are lurking for early 2023.
Last week’s worst performer: Asia stocks ex-Japan. If there’s a case for reviving a bullish outlook, it’s not obvious in AAXJ, which stumbled after three weekly gains. The fund’s deeply bearish posture, as a result, remains intact.
Looking at markets from a portfolio perspective offers a brighter review. All of our strategy benchmarks posted solid gains last week and four are now indicating bullish conditions. See this summary for design details on the benchmarks. Encouraging, but the question of staying power is still unresolved. If markets can successfully navigate through the economic reports of the next several weeks, the setup for a bullish January will gain traction. ■