No protection across asset classes and equity styles

 

The poor performance for both equities and fixed income should not be undervalued. There was some protection with shorter duration fixed income and credit, but the YTD declines in the AGG benchmark is just under 10% while the SPY index is down close to 14%. Any portfolio with more than 40% stocks will be down double digits. The situation is even worse if the investors were tiled to growth, small caps, or longer duration. 

Higher inflation, a hawkish Fed tilt that still seems behind the curve, economic data that suggests a slowdown in growth, and no direction with the Ukraine War is leading to a pessimistic environment. This was only further reinforced with earnings that overwhelmed many investors. Asset allocation trend models suggest that getting defensive may be the best solution to the current market environment. 

Trend futures model stable as we enter new month

Our trend futures models which look at short-term, medium-term, and long-term trends provide clear simple signals across the major asset classes and markets. 

All the fixed income markets are showing strong down trend.  All of the major currencies are showing long dollar positioning. The only currency exceptions are with long trends in the peso and real. All energy markets are showing long signals as oil and natural gas have continued their march higher. Precious and base metals are consistently showing short signals based on rising rates and potential slower growth. Stock indices also are generally moving lower with strong trends toward higher volatility.

Commodity markets are mixed with long signals for corn and soybeans as we enter the planting month. Cattle and hogs prices are moving lower, and softs are also headed lower. 

Trend models tell the same story - No gain from diversification

The worst-case problem for the diversified stock bond portfolio currently exists. Stocks and fixed income are both trending lower. Using our trend tracking system, I follow a key set of ETFs across asset classes, styles, and regions. The trend models are signaling the same thing for short, medium, and long-term trends - be short equities and bonds. 

For the asset allocation set of ETFs, all are giving short signals. The global regional exposures are also showing short signals for all timeframes. The same is seen for country exposures. There are only long-term long signals for selected market sectors, such as consumer stables, energy, and utilities. 

If you cannot get short, the only alternative is to hold cash and reduce beta or duration exposure. 

Inflation is a global problem well before the Ukraine War

Inflation is a global problem and an advanced economy problem as well as an EM issue. It is not a Russia-Ukraine War problem albeit the war has contributed to the recent commodity (food and energy) inflation. It is a global excess liquidity problem. See Agustin Carstens BIS speech "The Return of Inflation".  

It is a broad problem with even the bottom 25th percentile showing inflation above 5% for AE and 7% for EM. This inflation has been a surprise with last year and mid-year forecast both suggesting much lower estimates. While the Fed may tighten, there is still excess liquidity from the BOJ and ECB. There needs to be global coordination to eliminate global inflation.