The ETF Portfolio Strategist: 4 June 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Two hefty risks weighing on the outlook for financial markets dissolved on Friday. Not too shabby for a day’s work.
Late on Thursday the Senate passed a debt ceiling bill (which President Biden signed into law on Saturday), which green lights the government’s ability to borrow more money to pay its bills. US default averted. Meanwhile, on Friday morning, the Labor Department reported that US payrolls rose sharply more than expected, suggesting recession risk is still low.
The bullish news set the stage for a strong rally in US stocks on Friday. All of which clears the decks for refocusing on inflation and interest rate hikes as key risks for markets to digest and evaluate.
The key question: was Friday a one-off-sigh-of-relief rally that may not be indicative of things to come? Maybe, but assuming that stocks don’t sharply reverse in the days ahead it’s time to rethink the case for staying defensive. There are still plenty of threats that could create trouble down the road, but markets now seem to be betting that the growth and profits will prevail.
For some context, let’s start with the big picture. All of our strategy benchmarks posted strong gains for the past 5 trading days, including the global-16-fund index (G.B16), which jumped 2.6%. Year to date, G.B16 is up a solid 6.3%. Notably, G.B16 and three other strategy benchmarks are posting Signal scores of 5 (see table below), one notch below the highest level for bullish readings. See this summary for design details on the strategy benchmarks and this summary for how the metrics in the tables below are calculated.
US equities look especially strong at the moment. Vanguard Total US Stock Market (VTI) closed up 3.4% over the past 5 trading days and enjoys a red-hot 6 print for the Signal score.
This may be the start of an extended bull run for VTI. The fund has certainly recovered it’s mojo. For example, for the mid-range momentum indicator — Trend 4 in the table above — VTI is running hot again after a 1-1/2 hiatus, per the chart below. The revival suggests the ETF is set to trend higher for the near term.
A key risk for the bullish outlook is inflation. Namely, if pricing pressure remains stronger for longer, the Federal Reserve will be inclined to keep lifting interest rates, which in turn could force investors to reassess the newly minted run of optimism for risk assets.
Inflation has eased substantially since peaking last year, but the latest numbers suggest that the disinflation process may be fading. The core reading of the The Personal Consumption Expenditures price index edged up to 4.7% in April vs. the year-ago reading. That’s still well above the Fed’s 2% inflation target.
Next week’s May release (June 13) for the consumer price index will be closely watched for fresh clues on whether disinflation’s stall in April was an anomaly. The following day the Fed decides whether to hike rates again or put the tightening process on pause. ■