Risk Appetites at “11” — Evening Brief – 11.8.24
The appetite for US equities, and risk assets overall, ebbed and flowed leading up to the U.S. presidential election, but the first few days after Trump’s victory the bullish signals have reached “11”, based on numerous sets of ETF ratios. The main exception is US government bonds, which only received a brief respite following the FOMC’s decision to cut interest rates by a quarter-point on Thursday, as widely expected.
The ratio of the iShares Core Aggressive Allocation ETF (AOA) to the iShares Core Conservative Allocation ETF (AOA), a dependable indicator of investor sentiment regarding global asset allocation, reached a record peak on Thursday, propelled by a substantial rally in equities after lackluster performances in August and September. It is important to observe that equities outside the U.S., however, as indicated by the iShares MSCI ACWI ex U.S. ETF, did not take part in the surge, potentially due to uncertainties surrounding Trump’s proposed tariff measures.
Meanwhile, risk appetite for U.S. equities had a significant resurgence, as indicated by the ratio of the iShares Core S&P 500 ETF (IVV) to a low-volatility stock portfolio represented by the iShares MSCI USA Min Vol Factor ETF (USMV). It is important to note that this proxy remains below its July top, hence it is uncertain whether the resurgence in positive sentiment is sustainable.
The ratio of semiconductor companies, as represented by the iShares Semiconductor ETF (SOXX) to the broader US equities market (IVV), remains within a trading range, indicating a prudent approach. Semi stocks serve as a valuable indicator of the business cycle; so, their lack of participation in the advance raises concerns about the sustainability of the overall euphoric sentiment in the stock market.
Conversely, the ratio of safe-haven utilities, specifically the iShares U.S. Utilities ETF (IDU), to the IVV had a significant decline on Wednesday, indicating a strong demand for risk persists.
The bond market, by contrast, continues to face headwinds. The ratio of medium-term Treasuries, represented by the iShares Core 10+ Year USD Bond ETF (ILTB), to short-term maturities, indicated by the iShares Core 1-5 Year USD Bond ETF (ISTB), had a significant decline on Wednesday, reaching a five-month low, before a slight recovery after the rate cut.
Since September, sentiment has transitioned to a risk-averse stance favoring shorter maturities; yet current risk appetite is too robust to be derailed. Market sentiment significantly favors stocks over bonds.