Monitoring investment trends with ETF pairs: September 15, 2022

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Risk aversion sentiment is back, as recent market activity suggests. Maybe the risk never went away. There are many ways to assess this fact. Let’s check out one that uses market data via ETF pairs for real-time perspective, as of yesterday’s close (Wednesday, September 14).

The first is the ratio of utility stocks (XLU) to a large stock measure (SPY). By some accounts, the relative strength of utilities – a popular defensive slice of stocks – provides a real-time profile of the strength/weakness of risk aversion. On this basis, risk aversion sentiment continues to intensify via the continued rise in the XLU:SPY ratio.

U.S. Utilities Stocks vs. U.S. Stocks

The US Treasuries market sends a similar message, based on medium-term (IEF) governments versus their short-term (SHY) equivalents. For this profile, a falling ratio equates to a feeling of risk aversion for bonds, and in this regard, a new leg down seems to be unfolding lately.

US bond market trend

Inflation concerns are a key part of the latest wave of risk aversion, and this trend has recently revived via the ratio of inflation-linked Treasury bills (TIPs) to their nominal equivalent (IEF). When this ratio increases, it suggests that the reflation/inflation trade has strong momentum. But note that the clear uptrend has stalled, which may reflect a growing risk of deflation/recession. This leaves the question, is the last pop a last hurrah before this ratio turns around? Stay tuned.

Inflation/reflation trend in the United States

Risk aversion usually lines up with weak and falling stocks and rising bond prices, but this time it’s different. For the first time in decades, interest rates are rising steadily, weighing heavily on the bond market. Therefore, the traditional safe haven is not a safe haven. In turn, the two headwinds for stocks and bonds manifest themselves in the equity (SPY) to bond (BND) ratio, which is struggling to find direction this year.

Trend in US stocks and US bonds

Finally, a modest bias for defensive asset allocation is visible in this pair of Aggressive (AOA) versus Conservative (AOK) multi-asset class portfolios. Note, however, that while there has been a meandering bearish bias lately – suggesting risk taking – the trend from this 30,000 foot outlook has yet to become decisive and therefore a wait/wait pattern. neutral bias still seems dominant.

Global Portfolio Strategy Trend

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.