Broader Equity Risk Measures Still Defensive Despite Recent Rally — Evening Brief – 05.07.25
The U.S. equity market began 2025 with optimism, extending 2024’s rally, but sentiment soured as details of aggressive U.S. tariff policies emerged. Despite the recent impressive rally, a defensive posture persists, as evidenced by ETF pairs tracking risk appetite, reflecting investor caution amid trade tensions.
Global Asset Allocation Sentiment
The ratio of the aggressive iShares Core Aggressive Allocation ETF (AOA) to its conservative counterpart iShares Core Conservative Allocation ETF (AOK) signals the market is still in a broader risk-off stance. Despite a recent rebound, the 50-day average of the AOA/AOK ratio remains below its 200-day average, indicating weak bullish momentum. A shift to a bullish outlook would require the short-term average to surpass the long-term, likely contingent on clearer tariff resolutions. The White House’s call for patience on trade policy offers little reassurance.
U.S. Equity Sentiment
The SPDR S&P 500 ETF Trust (SPY) versus the low-volatility iShares MSCI USA Min Vol Factor ETF (USMV) shows a defensive risk posture as well. The SPY/USMV ratio has dropped significantly, reflecting negative sentiment for U.S. equities, exacerbated by tariff uncertainties.
U.S. vs. Foreign Equities
The Vanguard Total Stock Market ETF (VTI) compared to Vanguard FTSE Developed Markets ETF (VEA) highlights underperformance in U.S. stocks. VEA’s 10.2% year-to-date gain contrasts with VTI’s 6.3% decline, underscoring a preference for foreign developed markets amid U.S. economic headwinds.
Equities vs. Bonds
Risk appetite for SPY relative to the Vanguard Total Bond Market ETF remains frail. Investors are favoring bonds, signaling caution as equity markets face volatility.
Small-Cap Struggles
The iShares Core S&P Small-Cap ETF (IJR) continues a bearish trend relative to SPY. Already weakened before the trade war escalation, small caps face intensified pressure, with IJR’s performance lagging broader equities through early May.
Tariff Policy and Market Outlook
Investors are seeking signs of progress to alleviate global trade tensions, but optimism remains elusive. President Trump reaffirmed that negotiations are ongoing but emphasized that final decisions would be set on his terms:
“We’re negotiating with many countries, but at the end of this, I’ll set my own deals—because I set the deal, they don’t set the deal, I set the deal,” he told reporters Sunday. “This is not like a big deal that’s gonna be signed—in some cases we’ll sign them, but we don’t have to sign them. I’ll be setting the deal, I’ll be setting the tariff.”
Markets, however, remain skeptical, awaiting more concrete developments before reversing the risk-off trends that continue to weigh on sentiment.