The ETF Portfolio Strategist: 30 Jul 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Are the bulls back? It appears so, but for how long? That’s a big discussion. Let’s have a smaller one.
For a second straight week, gains swept across the Global Beta 16 landscape (as shown in the table below, which is ranked by 5-day return). Once again, Treasuries (IEF) are on the leading edge for upside momentum, based on our proprietary Signal score, joined this week by US investment-grade corporates (LQD). For details on the methodology, see this summary.
Are we at the cusp of a new bull run in US government bonds? The trend is looking a more encouraging, although at this stage there’s still a non-trivial degree of risk to ponder.
The Federal Reserve raised interest rates by a hefty 75 basis points this week, again. Market sentiment is starting to consider the possibility of softer rate hikes ahead. But until/if the incoming inflation data gives the central bank cover to cease and desist re: its aggressive tightening policy, the potential for trouble remains more than trivial for bonds.
The complicating factor is that US economic growth is slowing. That’s a plus for bond prices, at least in theory. GDP contracted in the second quarter, marking two straight quarterly declines, a back-of-the-envelope rule for calling recessions. The pressing question: Will a weakening economy offset high inflation for driving monetary policy decisions? The answer will likely determine if the bond market’s revival is more than a flash in the pan.
Meanwhile, US stocks and real estate investment trusts (REITs) are hinting at a turnaround. Broad market equities (VTI), small caps (IJR) and property (VTI) are now posting +2 Signal scores. That’s still weak tea, but it represents a notable uptick from recent weeks. Nonetheless, I’m inclined to let this trend mature a bit more before deciding that the odds are now skewed to the upside. First question: Will the +2 Signal scores for this trio tick higher in the next several weeks?
The rebound of late in US stocks and bonds has lifted the 60/40 strategy benchmark to a +2 Signal score, the strongest reading for our strategy benchmarks (see this sumary for the strategy benchmark designs). That’s a conspicuous reversal from the dark readings in recent history. But here, too, it’s too early to label this a rebound with legs. But after this week’s market action, that possibility looks a bit more plausible. Let’s see if the idea can survive the week ahead. ■