The ETF Portfolio Strategist: 28 JAN 2024
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Globally diversified, multi-asset-class portfolios are edging closer to a record high, based on a set of asset allocation ETFs. The iShares Aggressive Allocation ETF (AOA), for example, closed up 1.1% last week and looks set to establish a new peak, perhaps as early as this week.
Our proprietary signal Score certainly implies that further gains are likely. AOA ended Friday’s session with a reading of 5, one notch below the highest bullish score. See this summary for details on the metrics in the tables below.
The ongoing strength in US equities is suggestive that the trend will remain bullish for asset allocation strategies, but this reasoning comes with a glaring caveat. Broad measures of US stocks (think S&P 500) have climbed to record highs lately thanks to surging prices for tech stocks. But as The Wall Street Journal points out today: “The S&P 500 Rallied to Records on the Back of Just One Sector.” Meanwhile, “The 10 other sectors are trading an average of 15% below their all-time highs, and none has set a new record in January.”
The strength in US stocks may be overly dependent (and therefore vulnerable) to one sector, but the red-hot run in tech has more than compensated for the relative weakness elsewhere from a sector perspective. Vanguard Total US Stock Market ETF (VTI) stands out in the table below with a lone reading of 6 for the Signal score — the apex of bullish readings.
For asset allocation strategies, the strength in US equities (and to a lesser extent rallies in Europe and Japan shares) has been key for the rise in AOA and its counterparts in the land of multi-asset-class portfolios. But support outside of developed-world equities is thin to non-existent and so the likes of AOA continue to depend on the kindness of upside equities momentum.
The optimists argue that a broader run of support is brewing. Expectations that the Federal Reserve will start cutting rates, perhaps as early as March, keeps hope alive that the US bond market will deliver a new source of animal spirits later in the year.
On that note, this week’s Fed policy announcement and press conference (Wed., Jan. 31) will be closely watched for clues about rate-cut signaling. Although the consensus forecast sees a virtual certainty for leaving the central bank’s target rate unchanged at this week, Fed funds futures are estimating a roughly 50/50 probability for a cut at the March 20 meeting.
Presumably, rate cuts will reanimate bonds at some point, although for now a moderately bearish profile persists for US Treasuries (IEF).
Meanwhile, commodities are worth keeping an eye on as a possible recovery assets. After two years of losses, followed by flat-lining in recent history, GCC’s modestly positive Signal score of 2 may be an early sign that the worst has passed.
It’s not yet obvious that commodities are set to break out of the recent trading range, but the prospect of lower interest rates would be a plus in that the competition from high-yield fixed income will fade vis-a-vis 0% yielding commodities. We’ve heard that view before, only to find disappointment. Will 2024 be the year that commodities deliver an upside calendar year?