The ETF Portfolio Strategist: 30 October 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Most markets around the world bounced for a second week through Friday’s trading (Oct. 28). Is this a sign that we’ve seen the bottom for this year’s rout? No one can dismiss the possibility, but that view still strikes me as premature.
Part of my reasoning derives from thinking about two simple questions. Are the risk factors that triggered this year’s correction fading to a degree that inspires confidence that the worst has passed? Or are the headwinds that created the bearish aura still in play?
Answering precisely, confidently, flawlessly is impossible, for the usual reason: the future’s unclear. But after reviewing economic and markets data and trends in recent days (and considering several key geopolitical risks), it’s not obvious to this observer that 1) the main threats have passed or 2) the potential for negative surprises, on balance, is now relatively light.
In short, I’m still in the defensive camp, not to the degree I was a few months back, but still standing on this side of the aisle. Granted, my outlook will likely ensure that I’m late to the post-bottom rebound, whenever it arrives. That’s a calculated risk and one that’s preferable (for me, at least) to being early (i.e., before an actual bottom is reached). Everyone has to choose one or the other since no one (ignoring dumb luck) will be exactly right on calling a bottom in real time.
Keep in mind, too, that whenever market bottoms appear, the dates will almost certainly be different across asset classes, perhaps dramatically so in some cases.
My continued preference for a defensive posture is the byproduct of various analytical applications, including a simple review of price trends. Consider last week’s top performer for our 16-fund global opportunity set (G.B16): US real estate investment trusts (VNQ).
Vanguard Real Estate jumped for a second week, surging 6.3%. That takes some of the sting out of this year’s losses, but as the weekly price chart of VNQ reminds, momentum still looks clearly bearish and so the latest rise strikes me as one more in a series of bear-market rallies. Eventually, what appears to be a bear-market rally will mark the start of a new bull market, but knowing can only follow after a genuine bottom. Meantime, investors are left to guesstimate in real time where we are in the cycle and my guesstimate still leans bearish.
That said, some market corners appear closer to finding a bottom than others. US small-cap stocks (IJR), for instance, are still hurting, but the degree of pain appears to be receding. As the second-best performer last week, IJR’s 6.2% rally translates to a middling price for the ETF compared with the trading range year to date. It’s still not enough to persuade yours truly that IJR’s a compelling buy, but the fund appears to be stabilizing, or close to it. That’s in contrast to the stronger downtrend for VNQ.
Price trend isn’t always right, but it’s likely to be accurate more often than not through time vs. any one analyst’s outlook.
Our standard suite of portfolio strategy benchmarks continued to perk up last week too. See this summary for design details on the benchmarks. Encouraging, but the moderately depressed Signal scores (a measure of trending behavior) still suggests caution.
It’ll take several weeks at the earliest to decide if the current bounce in markets is another bear-market headfake or the start of an extended run higher. I’m still leaning towards the former, but I remain willing to change my view, assuming the markets provide convincing support. So far, I’m still waiting. ■