The ETF Portfolio Strategist: 9 JUN 2024

Trend Watch: Global Markets & Portfolio Strategy Benchmarks

Please note: Your editor will be traveling in the days ahead and so the next issue of The ETF Portfolio Strategist will be June 23.

Global markets rebounded after two weeks of modest declines, based on a set of asset allocation ETFs. The trend profile has remained bullish through the recent pullback, and it’s fair to say that after last week’s rebound the upside bias looks even stronger.

Notably, all four varieties of BlackRock’s asset allocation ETFs are posting solidly positive Signal scores of 5 — one notch below the highest possible bullish posture. See this summary for details on the metrics in the tables below.

The aggressive fund (AOA), for instance, rose 0.6% last week and for the year is ahead by 7.6%, closing just below a record high. On a technical basis, the outlook remains upbeat.

The question for strategists looking ahead: What factors could keep the party going?

Recall that the party appeared to be over in April, when markets reversed course and took a moderate hit. But prices quickly recovered and it’s fair to say that the trend emerged unscathed from the April stress test.

Unless you’re inclined to speculate, and/or have a very short-term focus, it’s usually advisable to piggyback on the prevailing trend until there’s compelling evidence to make a calculated risk that the trend is breaking down. For the moment, that evidence is in short supply from a top-down multi-asset-class portfolio perspective.

As usual, the profile is more complicated when the focus turns to the underlying markets that comprise global asset classes. US stocks (VTI), US junk bonds (JNK) and their foreign counterparts (IHY), and equities in Europe (VGK) are the bullish outliers in terms of Signal scores (see table below). Bonds tend to struggle at/near the opposite extreme.

US Treasuries appear to be bottoming, but we’re still well short of clear signals that suggest an upside trend is high-probability scenario. But IEF’s bear market has ended and we’re now in what seems to be a trading range. The key factors to monitor that will determine if there’s a new bull run brewing: incoming inflation data and the ebb and flow of recession risk estimates.

On the inflation front, all eyes are focused on Wednesday’s US consumer price numbers for May. Economists expect more of the same in the data, which is to say that sticky inflation will persist. If so, the bond market will likely tread water until stronger evidence emerges for either disinflation or reflation. For now, the data seems to point to somewhere betwixt and between.

On the question of whether the slowdown in US economic activity is stabilizing there’s enough support on both sides to keep the crowd guessing. Last week was a good example. On Wednesday, the Labor Department reported that job openings continued falling, dropping to the lowest level in over three years. The news fueled a rally in Treasuries that extended sharp cuts in the 10-year Treasury yield. But the bond market rally reversed sharply by Friday, following news that US payrolls in May rose substantially more than expected.

A crucial topic for the week ahead is how the Federal Reserve is interpreting the mixed views on inflation and the economy. There will be fresh clues to decipher on Wednesday, June 12, in Fed Chairman Jerome’s press conference, which follows the central bank’s announcement on interest rates and a new round of economic projections. It’s widely assumed that the Fed will leave its target rate unchanged, which means that analysts will go deep on interpreting the economic projections and commentary in the Powell presser.

The issue for investors at this point is deciding if anything meaningful will change on the other side of Wednesday? I’ll go out on a limb and say “no.” When the dust clears, I expect that in the wake of CPI data and a Fed meeting we’ll still be debating if inflation is likely to remain sticky. In turn, that will keep the macro forecasting mills churning on whether the Fed will keep rates higher for longer and whether the recent slowdown in US economic activity will stabilize or slip further and raise recession risk.

Plus ça change, plus c'est la même chose. ■