Summary
- Risk-off sentiment is back, or so recent market activity suggests. Maybe risk-off never left.
- Inflation worries are a key part of the latest run of risk-off, and this trend has revived recently via the ratio of inflation-indexed Treasuries vs. their nominal equivalent.
- Finally, a modest bias for defensive asset allocation is visible in this pair of aggressive vs. conservative multi-asset-class portfolios.
Risk-off sentiment is back, or so recent market activity suggests. Maybe risk-off never left. There are many ways to assess this state of affairs. Let's check in on one that uses market data via ETF pairs for some real-time perspective, as of yesterday's close (Wed., Sep. 14).
First up is the ratio for utilities stocks ( XLU ) to a broad measure of equities ( SPY ). By some accounts, the relative strength of utilities - a popular defensive slice of equities - provides a real-time profile of risk-off strength/weakness. On that basis, risk-off sentiment continues to run hot via the ongoing rise in the XLU:SPY ratio.
The US Treasuries market is sending a similar message, based on medium-term governments ( IEF ) relative to their short-term equivalents ( SHY ). For this profile, a falling ratio equates with risk-off sentiment for bonds, and by that yardstick, a new leg down appears to be unfolding lately.
Inflation worries are a key part of the latest run of risk-off, and this trend has revived recently via the ratio of inflation-indexed Treasuries ( TIP ) vs. their nominal equivalent ( IEF ). When this ratio is rising, it suggests the reflation/inflation trade has strong momentum. But note that the clear upside trend has stalled, which may reflect rising deflation/recession risk. That leaves the question, is the latest pop a last hurrah before this ratio rolls over? Stay tuned.
Risk-off usually aligns with weak, sliding equities and rising bond prices, but this time is different. For the first time in decades, interest rates are rising persistently, and that's taking a toll on the bond market. As a result, the traditional safe haven is no safe haven. In turn, the dual headwinds for stocks and bonds are showing up in the stocks ( SPY ) vs. bonds ( BND ) ratio, which is struggling to find direction this year.
Finally, a modest bias for defensive asset allocation is visible in this pair of aggressive ( AOA ) vs. conservative ( AOK ) multi-asset-class portfolios. Note, however, that while there's been a meandering downside bias lately - suggesting risk-off - the trend from this 30,000-foot perspective has yet to turn decisive and so a holding pattern/neutral bias still looks dominant.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Monitoring Investment Trends With ETF Pairs: September 15, 2022