The ETF Portfolio Strategist: 27 OCT 2024

Trend Watch: Global Markets & Portfolio Strategy Benchmarks

Markets retreated last week, marking the first weekly setback this month. The slide took a fair amount of the wind out of momentum’s sails, but not enough to tip the scales into a full-out bearish posture.

All four ETF proxies for global asset allocation fell in excess of 1%, but the slide barely put a dent into the robust year-to-date results. The most aggressive allocation (AOA) is still up more than 14% in 2024, for example.

Our proprietary Signal score, however, retreated to a modest bullish posture for all the funds. No big deal, perhaps, but this is the first time since the spring without green on the screen. In other words, none of the funds in the first table below are posting strong upside momentum scores. In all the updates on these pages since late-May, at least one asset allocation ETF in the list below has scored high for upside strength. In today’s update, the Signal scores are still in net-positive terrain (above 0), but modestly so. See this summary for details on the metrics in the tables.

It’s too soon to confidently explain the downshift as noise or signal, but it’s certainly worth keeping a close eye on markets to see if the weakness persists or stabilizes/reverses.

Based on the Global Trend Indicator (GTI), the case for cautious optimism rolls on. This benchmark, which summarizes the directional bias for the four asset allocation ETFs listed above, is reflecting newfound strength after a turbulent August and September. With the benefit of hindsight, the turbulence turned out to be a head fake as an early warning of deeper, extended weakness for global markets. Indeed, GTI has recovered in October and recently set a new high. Notably, GTI’s 50-day average inched above its 100-day counterpart for the first time since early September. If the latest weakness in markets is an early sign of trouble, GTI’s momentum profile isn’t picking up on it to date. That alone doesn’t suffice to remain complacent on the outlook for markets, but it certainly is a robust factor in favor of the bullish camp.

As for your editor’s overall interpretation of recent market activity, the tea leaves suggest to yours truly that markets will trade in a range for the near term. Short of the dreaded but unknowable exogenous event that may be lurking around the next corner, I’m expecting that markets will churn without going very far, up or down, in the days ahead.

Nonetheless, I’ll be sleeping with one eye open for at least two reasons. First, the upcoming US election on Nov. 5 could be a significant event for markets. In particular, if Donald Trump wins (a roughly 50/50 proposition given the latest polling), a change in policies on several fronts, of more than a trivial degree, is virtually certain. Without getting into the weeds about whether a second Trump presidency is a net positive or negative for the US economy and/or markets, it’s safe to say that a Donald redux at 1600 Pennsylvania Avenue would mark a sharp change from Biden’s tenure. By contrast, a Harris win would, at least initially, likely extend current policies (with minor changes) into the near term.

A Trump presidency, in short, would mark a break with the status quo. As such, there’s more uncertainty (arguably significantly so) on the other side of Trump win vs. a Harris win. Although some analysts predict a Trump win would prove to be a bullish development for markets and the economy, there’s room for debate. Whatever side you’re on, the one thing that’s clear is that a new era, for good or ill, may be at hand and it remains to be seen how markets react to a regime shift in Washington.

The second factor that’s on my short list is the potential for a backup in Treasury yields beyond what we’ve seen so far. The benchmark 10-year rate has already popped sharply this month, closing at 4.25% on Friday. As recently as Sep. 16 it was flirting with 3.60%. The US stock market has mostly shrugged off the yield rebound, but recent history suggests that a sustained move higher for the 10-year yield from current levels would attract closer scrutiny from an equities perspective, and not in a good way. For example, the April selloff in stocks was accompanied by a sharp rise in the 10-year yield above 4.25%, which is where the market settled on Friday.

The good news is that the backup in yields this time appears to be primarily driven by better-than-expected economic news. Perhaps that’s why the stock market remains cavalier so far about the latest runup in rates.

Hold that thought as the week ahead unfolds, and dispenses several key economic reports that will either challenge or reaffirm the strong-economy narrative of late. In turn, the numbers on tap for the week ahead could play a significant role in moving Treasury yields up or down.

Two key releases in particular deserve close attention, starting with the first look at the government’s third-quarter GDP report (Wed., Oct. 30). The consensus forecast sees another strong rise: a 3.0% annualized increase in Q3, matching Q2’s advance.

On Friday, Nov. 1, we’ll see nonfarm payrolls for October, and here’s where things may get tricky. Economists are expecting a sharp slowdown in hiring to 140,000 increase vs. a rise of 254,000. A 140,000 advance is relatively subdued vs. recent history, although one monthly print at this level is well short of a red flag for the immediate future. The complication: How much would a slowdown in hiring reflect temporary affects from two severe hurricanes that struck the Southeast US in September?

Even if the economic news this week turns out to be a net plus for markets, the election in the following week will keep investors guessing. The next couple of weeks, in short, look set to be a stress test, one way or another. Buckle up! ■