For this week’s featured indicator, we show a chart of the relative performance of stocks versus bonds globally based on the relative strength line of the ACWI SHUT Index.
SHUT is an acronym for Staples, Healthcare, Utilities, and Telecommunications. The ACWI SHUT Index is an equal-weighted composite of these four global sectors. Historically, these sectors have had low betas (volatility) versus the rest of the market, so we call them “defensive” sectors.
The basic idea behind this indicator is that when these defensive sectors are doing well relative to the rest of the market, it’s generally a poor environment for overall stock market returns. We determine this by plotting a ratio of the global SHUT index to a global stock market index that excludes the SHUT sectors. This is called a relative strength line. If it is rising, it means the defensive sectors are outperforming; if it is falling, the defensive sectors are underperforming.
We use something called a moving average crossover to generate the positive and negative signals for this indicator. Basically, this means that when the returns for the defensive sectors have been stronger over the past month versus what they were four months ago, it’s a negative sign for global stock returns relative to bonds—and vice versa.
Historically, these signals have been excellent. And you can clearly see the power of this concept if you step back and just focus on the overall trends in the global SHUT Index’s relative strength line.
For example, looking at more recent history, the SHUT sectors were in a general uptrend from mid-2018 to the beginning of 2020. Relative to bonds, global stock returns were roughly flat during that time. In other words, there was a lot of defensive sector strength, so the overall stock market struggled.
But then the SHUT sectors plummeted after the March selloff as investors got more aggressive. Like the indicator would suggest, stocks have soared relative to bonds as investors have stopped playing defense. The SHUT Index’s relative strength line is now near record lows.
Going forward, if this trend reverses and the defensive sectors start gaining strength again, it could spell trouble for global stock returns relative to bonds if history is any guide.
This is intended for informational purposes only and should not be used as the primary basis for an investment decision. Consult an advisor for your personal situation.
Indices mentioned are unmanaged, do not incur fees, and cannot be invested into directly.
Past performance does not guarantee future results.