Risk Appetite Rebounds For Global Strategies After Tariff Tantrum

Global asset allocation signals a robust return to risk-on sentiment, with long-term indicators for diversified portfolios having remained positive throughout recent market volatility. However, a more nuanced picture emerges for specific US asset classes, where caution persists as evidenced by incomplete recoveries in risk-appetite measures, continued weakness in US stocks relative to foreign equities, and a 'grey area' for the US stocks-to-bonds ratio. This divergence is attributed to lingering uncertainties surrounding Federal Reserve policy, tariffs, and potential inflation from the pending spending bill, indicating that while US market sentiment is improving, it has not yet fully committed to a risk-on posture.

Analysis

A divergence in investor sentiment is evident between global and US-centric asset classes. From a high-level perspective, risk-on appetite has returned, exemplified by the robust performance of an aggressive global allocation ETF (AOA) relative to its conservative counterpart (AOK). Long-term trend indicators for globally diversified portfolios reportedly remained positive throughout the recent market turmoil. However, a more granular analysis of US assets reveals a muddled and cautious picture. While the S&P 500 (SPY) has reached a new record high, a key risk-appetite measure—the ratio of SPY to its low-volatility equivalent (USMV)—has not fully recovered from its April decline. Furthermore, US stocks (VTI) continue to exhibit relative weakness against both foreign developed market equities (VEA) and emerging market equities (VWO). This trend of underperformance extends to US small-caps (IJR) versus large-caps (SPY). The ratio of US stocks (SPY) to bonds (BND) remains in a 'grey area,' with its 50-day moving average still below its 200-day average, signaling that conviction is lacking. This hesitation in US markets is attributed to lingering uncertainties surrounding Federal Reserve monetary policy, tariffs, and the potential inflationary impact of pending fiscal spending.

Key Decisions for Investors

• Consider the persistent relative strength in foreign developed (VEA) and emerging market (VWO) equities over US stocks (VTI) when evaluating geographic allocations.
• Within US equity exposure, the ongoing underperformance of small-caps (IJR) relative to large-caps (SPY) suggests a continued focus on large-capitalization companies may be warranted.
• Despite record highs in the S&P 500, the cautious technical signal from the stock-to-bond ratio and key macro uncertainties call for monitoring risk indicators rather than adopting an unreservedly bullish posture.