The ETF Portfolio Strategist: 8 Jan 2023
Trend Watch: Global Markets & Portfolio Strategy Benchmarks
Is this the set-up for a bullish 2023?
Nearly every slice of our global 16-fund opportunity set rallied in the opening trading week of the new year and most of the field flipped to strong momentum scores via the Signal metric show in the table below. For details on the metrics in the table below, see this summary.
This is how bull markets begin. It’s also how head fakes start. Deciding which one we’re looking at will take more time, but at this stage the potential for a durable recovery in markets looks the most compelling relative to conditions over the past year. Deciding if this is the genuine article is still open for debate, but let’s declare victory for today and say it’s been a good year so far.
One indicator I’m watching closely: trending behavior for the G.B16 strategy index. See this summary for design details on the benchmarks. For much of 2022, this benchmark has been caught in a bear market, but that may be changing. The latest rally has lifted G.B16 to just below its 200-day average. That may be a set-up for G.B16’s 50-day average to rise above the 200-day average at some point over the next several weeks. If and when that occurs, and the majority of its component markets (per the table above) hold on to their bullish profile, it may be time to ring the all-clear bell for multi-asset-class portfolio expectations.
But let’s not pop the corks just yet. There are plenty of landmines ahead (still), including ongoing rate hikes by the Federal Reserve and the still-unfolding lag effects of previous hikes on the economy. The case is strengthening for thinking that inflation has peaked, but let’s see if this week’s consumer price report for December (Thurs., Jan. 12) reaffirms that view. Economists are optimistic, based on the consensus forecast. If they’re wrong, the optimism that’s bubbling could fade quicker that champagne bubbles on the morning of January 1.
Meanwhile, the US stock market has much to prove before we’re convinced that the bear market has ended. Although American shares (VTI) rallied sharply on Friday, lifting the broad market above its recent trading range, it’s too soon to know if this is noise or signal relative to the downside trend that’s dominated over the past year, and so I remain defensive on the near-term outlook.
The trend for stocks in Europe looks more encouraging on a trend basis. VGK appears to be breaking out of its bearish pattern of late by rallying to a seven-month high close on Friday.
Asia stocks ex-Japan (AAXJ) are also showing signs of rebounding.
US Treasuries (IEF) may be in the early stages of recovering, or at least stabilizing, after a horrific 2022. This week’s CPI data, assuming it’s encouraging, may ignite a rally in IEF that carries it above its recent trading range. Look for the opposite if inflation surprises on the upside.
January, in other words, could be critical for deciding if the downside bias of 2022 is ending. The joker in the deck remains the war in Ukraine, which still has the potential to unleash bearish surprises, perhaps in the extreme. But for now there are nascent signs that risk markets are inclined to climb a wall of worry. ■