The ETF Portfolio Strategist: 30 September 2020

Stimulus or no stimulus? That is the question (and has been for months), but the false dawns have run out of road in Washington. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin gave it one more try today (Sep. 30) but no dice. Maybe they’ll pull a rabbit out of the hat but at this stage that’s considered a near-zero probability ahead of the election.

Reading the writing on the wall, a growing number of economists have cut their forecasts for economic growth for the next quarter on the assumption that the Pelosi-Mnuchin show will remain all light and no heat.

If that’s bad news for the stock market it’s not obvious, at least not this week. Although US equities have been sliding recently, Vanguard Total US Stock Market (VTI) continues to bounce. For the week so far through Wednesday’s close, VTI is up 2.0%. If the ETF can hold on to a gain through Friday, this will be the first week in five that financial gravity took a breather.

Foreign equities are humming a similar tune, although a notable exception in the major markets is Japan, where the bullish winds are blowing a touch stronger. Indeed, iShares MSCI Japan (EWJ) is looking relatively strong these days as the fund continues to flirt with its pre-pandemic high.

Asia ex-Japan (AAXJ) isn’t looking too shabby either. Ditto for China (MCHI). By comparison, Europe (VGK) appears slightly wobbly.

US bonds, meantime, are still holding on to gains earned from the coronavirus-triggered risk-off trade in February and March. For Treasuries, that continues to translate into handsome year-to-date results. But what have you done for me lately? The iShares 7-10 Year Treasury Bond (IEF) is still going nowhere fast as traders extend the summer flatline through the end Q3.

US corporates (LQD), however, appear to be succumbing to bearish forces.

From the 30,000-foot view, however, trading has turned a bit dull this week. Is this a transition as the crowd refocuses on US election risk in the final run to Nov. 3? Whatever the explanation, getting a handle on market behavior isn’t getting any easier. There are more mixed messages at the moment than a retail outlet flush with TVs.

After the close on Friday we’ll reassess the risk profile for our standard set of portfolios. Recall that at last week’s close there were considerably more risk-off signals for Global Managed Drawdown (G.B16.MDD), which smells blood in the water. It’s not yet clear if that’s prescient or imprudent. Let’s see what the cat drags in for the remainder of the week. ■