Global Breadth Breaking Down
Stocks have been buoyed by quiet strength, but that tailwind is dissipating
In periods of economic, political and humanitarian stress, writing about the markets and how best to allocate financial capital can seem . . . well, a bit shallow. But it can also be cathartic. I can’t do anything about those external forces (certainly in the short-term and perhaps in the long-term as well). As an allocator of capital, I need to take those as given and choose the best course of action. Controlling what I can control (i.e. my actions) while the world seems to spin out of control can be grounding and empowering.
As such, we need to look through the news headlines of the day and set our course based on what is actually happening. What we are seeing right now is that the broad global strength that has supported stocks in the US and around the world over the past year-plus is being challenged. The percentage of global markets above their 50-day averages has collapsed and is at its lowest level since last spring.
Last week also saw the percentage of markets at new 13-week lows spike to the highest level since late 2024.
Zooming out for perspective, our global equity trend indicator has pulled back to 75%. If it stays at or near its current level and then rebounds, the current blip in the price action will go down as nothing more than a healthy reset. If, however, the global equity trend continues to weaken, the risk of a meaningful correction/bear market will rise. In the case of the former, staying the course is the most prudent action. In the case of the latter, stepping aside and preserving capital makes the most sense.
It is worth noting that coming into this episode, equity exposure was elevated and cash levels were dropping. The AAII asset allocation survey for February showed the lowest allocation to cash since late 2021. In other words, there is plenty of room for investors to shift away from stocks and toward safer harbors if appetite for risk resets lower.
