The ETF Portfolio Strategist: 29 SEP 2024

Trend Watch: Global Markets & Portfolio Strategy Benchmarks

Mr. Market may be leading us astray, but his current signaling is nothing if not confident: the trend remains positive and the near-term outlook looks encouraging.

Contrarians may be inspired to take the opposing view. Ditto for low-risk investors. Yet the case for expecting trouble in markets, at least for the near-term horizon, relies on expecting mean reversion to kick in any day now. The trend analytics, however, assign low odds for that scenario. But before you go down this path, let’s upack some of the implications and where those implied odds are coming from.

For a big-picture overview, here’s how four global asset allocation ETFs are faring. Suffice to say, the bias remains solidly positive across the spectrum of risk levels. See this summary for details on the metrics in the tables.

Summarizing the trends in the table above via the Global Trend Index (GTI) shows that the recent wobbles for this benchmark (a composite of the four asset allocation ETFs listed above) has mostly reversed on a short term basis.

Zooming in on year-to-date results, however, reminds that there’s still room for debate on whether the back and forth of late is noise. Note that GTI’s 50-day average remains below its 100-day counterpart — a weakness that implies that it’s premature to dismiss the possibility that global markets’ momentum has peaked.

Yet if we turn to profiling global markets on a more granular levels, it’s not obvious that trouble is lurking. In fact, this is the first time in recent memory, if not longer, that all the key flavors of the major asset classes are posting robust bullish Signal scores.

One view of the recent strength in markets is that the crowd is all in on the narrative that the Federal Reserve has successfull engineered a “soft landing.” Having tamed the inflation beast, the central bank’s confidence led it start cutting interest rates earlier this month.

Meanwhile, the widely discussed topic in August that a US recession has started, or is imminent, increasingly looks premature… again. For example, the current update for the Dallas Fed’s Weekly Economic Index (WEI) rose to a 2-year high as of Sep. 21. That’s another strong clue that tells us that the third-quarter will be recession-free once all the numbers are published.

Another is the Atlanta Fed’s GDPNow model, which is currently estimating (as of Sep. 27) that the upcoming Q3 GDP report from the Bureau of Economic Analysis will print at +3.1% — slightly above the strong +3.0% increase for Q2.

The economy still looks set to chug along while disinflation remains the plausible path ahead that will keep rates cuts bubbling on the near-term horizon. The only debate here seems to be on whether a 25- or 50-basis-points cut is likely at the next FOMC meeting on Nov. 7: Fed funds futures are essentially pricing the odds as a coin toss at the moment.

The current macro profile, in short, looks quite rosy. But there’s an elephant in the room, albeit one that markets continue to minimize as a risk factor. Yet global turmoil is a real and present danger, even if markets continue to effectively look away while the Middle East and Ukraine burn.

Yes, that’s old news and one can imagine a scenario where the escalating troubles remain contained, if only in Mr. Market’s mind. The bullish view is that the past is prologue, and so worrying about geopolitical hazards is to immerse oneself in the analytical mindset of yesteryear.

There’s a certain logic to such thinking, at least from a US perspective. America is no longer reliant on imported oil (thanks to the surge in fracking output), and so Middle East chaos doesn’t hang over the US economy as an energy-driven sword of Damocles as it did in the 1970s.

Fair enough. But wars that involve the great powers have consequences — consequences that are still in flux. Wars are also notorious for unexpected consequences.

Anxiety about what could go wrong may turn out to be one more round of hand-wringing that ends up as another opportunity cost. But with the S&P 500 just a few ticks below a record high, and most global asset allocation strategies similarly positioned, it’s hard to ignore the spilt-screen contrast of war and chaos vs. bull market celebrating and one in which the latter overwhelms, suppresses and contains the former form an investment perspective.

Yes, this could be the new world order, but your editor isn’t quite yet ready to bet the farm on it, even if that’s the implied advice from the trend data. On that basis, you could say I’m still inclined to dip my feet into the contrarian pool, if only on the margins. Alas, that’s been a losing proposition to date.

But this decision isn’t limited to warm and fuzzy worries about what could happen. A 6-month Treasury bill is offering a 4.35% yield, for instance. Will stocks materially outperform? Maybe, although given the current state of the world there’s a case for making a small bet otherwise, if only to hedge the unexpected.

Granted, that’s a calculated risk and some calculated risks inevitably turn out to be roadkill. Yet investing writ large is a series of calculated risks, and history suggests it’s prudent to maintain exposure to several calculated risks through time. Some aspects of the money game are clear for the simple reason that the future is not. ■