The ETF Portfolio Strategist - Saturday, Aug. 21

A Rough Week for (Most) Markets

Red ink was nearly everywhere. Save for Treasuries and investment-grade US corporates, our 16-ETF opportunity set was conspicuously biased to the downside for the trading week through Friday, Aug. 20.

US governments bucked the trend, just slightly. The iShares 7-10 Year Treasury Bond ETF (IEF) edged higher for a second week. The modest gain stands out in a crowd of red, but IEF appears to be consolidating its recent gains these days with a lazy inclination to tread water, more or less.

The fund’s moderately high MOM score — 80, which is just below the top-ranked 100 — is encouraging. Ditto for contrarian minded investors by way of our Mean Reversion (MR) metric, which is current a low 22 (vs. a lowest score of 0), which reflects a five-year return for IEF that’s near the lows of recent history. But for our money, we’re closer to neutral on the prospects for bonds generally.

US investment-grade corporates are posting a similar profile: relatively strong upside momentum and a five-year return that’s below the median by way of recent history. Is that enough to power a new run higher? The case for answering “yes” will get a boost if LQD can decisively take out its previous high—roughly $136, or just above Friday’s close of $135.23.

Bonds face a tricky environment in the days ahead as the crowd awaits monetary pronouncements from on high from the Federal Reserve as they mingle at their annual symposium in Jackson Hole, Wyoming next week.

There’s growing chatter that the central bank is poised to soon begin pulling back from its dovish monetary policy, in part because inflation has surged lately. By some accounts, the Fed’s behind the curve and needs to play catch-up. If so, bonds are vulnerable.

But call us mildly skeptical (still). Although economic growth is still strong, the trend is decelerating. What of inflation? Yes, it’s shot sharply higher, but this jump appears to be peaking (if it hasn’t already done so), based on our proprietary Inflation Trend Index (ITI).

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