The ETF Portfolio Strategist: Saturday, Feb. 20

US Equities on the Defensive As Treasury Yields Continue to Rise

Maybe it wasn’t solely about the ongoing upswing in rates, but it probably didn’t help. Whatever the reason(s), US shares fell 0.7% this week through Friday’s close (Feb. 19), based on Vanguard Total US Stock Market (VTI).

The ETF posted its first weekly decline in three weeks. That still leaves the fund close to a record high, which was set only a week ago. But with interest rates rising and displaying an increasingly robust upside trend, the burning question is: How much tolerance can equities muster if the reflation trade for yields rolls on?

US equities had plenty of company with downside pricing this week. As our standard 16-fund opportunity set (global proxies in the aggregate for the major asset classes) shows below, red ink dominated this week. Among the big losers were US investment-grade bonds (Treasuries and corporates).  

The iShares 7-10 Treasury Bond ETF (IEF) continued to slide this week, tumbling 1.1% to its lowest close since last March.

US corporates also took a hit this week — down 1.1% via iShares iBoxx $ Investment Grade Corporate Bond (LQD). Note that both IEF and LQD have been on the sell list all year via one of our proprietary strategies: Global Managed Drawdown (G.B16.MDD) -- see, for example, this update. 

Perhaps at this late date it’s not surprising that our proprietary momentum indicator (see the MOM column in the table above) has been routinely profiling IEF with deeply negative trending behavior. Keep in mind, however, that another proprietary strategy — Global Managed Volatility (G.B16.MVOL) has yet to fall in on the risk-off bias for bonds, and so we’re arguably still in a gray area. Stay tuned. 

While there was no shortage of losses this week, there were a handful of upside outliers. In particular, Africa stocks continued rising, posting a third straightly weekly advance. VanEck Vectors Africa (AFK) -- the strongest among a trio of gains this week for our global opportunity set. Commodities (GCC) and international junk bonds ex-US (IHY) also eluded this week’s financial gravity.

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For details on strategy rules and risk metrics in this article, see this summary.

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