The ETF Portfolio Strategist: 6 Aug 2022
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Risk-on appears to be resonating in some slices of financial markets — see yesterday’s update on US equity sectors, for example. But looking at global markets from a broader, top-down perspective suggests a more subdued rebound at best.
For out global 16-fund opportunity set there’s a rumbling of recovery running through US small caps (IJR), although we’re reluctant to call this the start of a new extended run higher.
Overall, markets are in a more or less neutral state, based on the Signal score. The two extremes are small caps (IJR) on the upside and broadly defined commodities (GCC) on the downside. Otherwise, a middling batch of Signal scores implies that there’s no reason to rush ahead with a new embrace of risk.
It doesn’t help that yesterday’s hotter-than-expected US jobs report for July will likely keep the Federal Reserve on a hawkish policy path for the near future, perhaps with another hefty 75-basis-points hike at next month’s FOMC meeting.
It’s not clear that risk assets have fully priced in the ramifications of interest-rate hikes that could run on for longer and higher than expected. High inflation will keep the Fed in a hawkish stance until there’s clear evidence that the upside trend for pricing pressure has cracked. The next update on this front: Wed., Aug. 10. The consensus forecast sees US consumer inflation easing a bit on a year-over-year basis, but even if that’s true it won’t be enough to stay the Fed’s rate-hiking hand.
There’s also the potential for a new surge in geopolitical risk courtesy of the heightened tensions via the nexus of Taiwan, China and the US after House Speaker Nancy Pelosi’s Taiwan visit stirred up a hornet’s nest of international risk in East Asia.
Staying defensive also looks compelling on portfolio-strategy basis. All of our strategy benchmarks remain in neutral range of Signal scores (see this sumary for the strategy benchmark designs). Given the current macro and geopolitical backdrop, the case for aggressively stepping up exposure to risk assets still looks premature. ■