When the market collapses as it did during December, it’s usually a function of ETF and futures driven selling. Rather than going through the process of selling individual stocks, larger investors use these baskets of securities to effectively sell everything at once. This is especially true when we’re talking about short-term, algorithmic style trading.
Most investors, including myself, generally sit squarely within one of two camps: bullish or bearish. My research and observations over the years have left me with a rather simple premise on which to base this judgement. When the economy is expanding, remain firmly bullish, and when growth begins to slow and recession clouds gather, get bearish.
I want to begin today with a look at ACWI - the All-Country World Index ETF, which you can see in the top panel below. This ETF tracks the MSCI benchmark and provides exposure to large and mid-cap companies across 23 developed markets and 24 emerging markets. Approximately 85% of investable global equities are included in this index.
I’ve been in the retest camp for some time now, expecting the market to plumb the lows from Christmas Eve, but the market has steadfastly moved higher. In part this is due to earnings coming in better than expected (and guidance not being as awful), but I also believe a lot of it has to do with the marked shift from Fed Chairman Jerome Powell.
Over the last few months we’ve talked a lot about the idea that it is global growth, as opposed to domestic growth, that is presenting the biggest challenges for financial markets. Unfortunately, that message remains relatively unchanged, and is creating a mixed picture for investors.
Let’s begin with a look at economic conditions abroad, and then we’ll circle back to some the not-so-bad developments here in the States.