US Equity Rally: Too Much or More to Go? — Evening Brief – 10.15.24

There is still room for debate regarding whether the appetite for risk has reached its peak for this market cycle. The most compelling argument for the bullish view is found in a global asset allocation framework, as evidenced by the utilization of a variety of ETF ratios to assess conditions. However, a more detailed examination of the markets yields an inconsistent picture.

Global asset allocation has experienced a significant resurgence. Following two months of testing support levels without indicating a definitive risk-off signal, the ratio of an aggressive mix of global assets, represented by the iShares Core Aggressive Allocation ETF (AOA) compared to the iShares Core Conservative Allocation ETF (AOK), has rallied sharply in recent weeks and is nearing the record high registered in the middle of July.

This likely means that market sentiment remains bullish, and prices appear to be on pace to reach new highs in the near term. If this ratio surpasses its prior high, it will bolster the rationale for keeping a risk-on stance in global strategies.

The picture for US equities, however, is somewhat more complex. Despite the S&P 500 Index achieving a new record high last week, a stock proxy indicates a more prudent stance, as evidenced by the ratio of the SPDR S&P 500 ETF Trust (SPY) to the iShares MSCI USA Min Vol Factor ETF (USMV). Although this ratio has recently recovered some of its bullish momentum, it remains far below its prior top, implying that market momentum in this space is still modest at best.

“While the equity market’s gain over the last two years have been largely in line with the long-term average at the outset of a cycle, it has been unusual in that it has come without a significant pullback,” Bryan Jordan, chief strategist at Cycle Framework Insights, Inc., told Connect Money. “The market remains overdue for a correction, especially given the sharp turn in sentiment in recent weeks.”

The number of corrections in the S&P 500 since the current bull market began in 2022 is zero, noted Jordan, the longest stretch without a 10% pullback at the outset of a cycle since the 1930s.

The ratio of semiconductor shares, as represented by the iShares Semiconductor ETF (SOXX) and the SPY, exhibits a comparable trend. The modest relative recovery of semi stocks suggests a degree of caution in the near term, as they are considered to be a useful proxy for the business cycle.

Concurrently, the safe-haven investment in the iShares U.S. Utilities ETF (IDU) compared to the SPY indicates a revived interest in defensive assets.

The US bond market has recently experienced renewed strength; however, a risk appetite proxy indicates uncertainty regarding the potential for a prolonged bull market in fixed income, as evidenced by the ratio of the iShares 5-10 Year Investment Grade Corporate Bond ETF (IGIB) to the iShares Short Treasury Bond ETF (SHV).

The ratio of the SPY to the Vanguard Total Bond Market Index Fund ETF (BND), a proxy that reached a new record high last week, is one factor that contradicts the cautious signals. The rally will bolster the notion that there is still a risk-on sentiment if this ratio continues to rise in the coming weeks.