If anything is worrying the stock market, you couldn’t tell by looking at the indexes which marched higher to new highs (for the Dow and S&P) with the Dow Jones gaining 1.06%, the S&P 500 added 1.40%, the NASDAQ up 2.56% and the Russell 2000 tacked on 86 basis points.
The yield on the Ten Year US Treasury Note (NYSEARCA:IEF) fell to 2.31% including a drop on Friday after CPI reported at 0.1% for the month (1.6% year over year). Retail sales (NYSEARCA:XLY) fell 0.2% versus the expectation for a slight gain. The economy has been sputtering for months with no obvious indication for meaningful improvement soon.
This year has been marked by volatility (NYSEARCA:VXX) in the slope of the yield curve; flattening for months, aggressive steepening for a couple of weeks and then more flattening last week. The changing yield curve dynamics have been a driver of equity market action. When the curve flattens, the historical tendency is for growth to outperform which has been the case year to date; growth ahead of value by hundreds of basis points. During that brief interlude of curve steepening, value came roaring back which is also the historical tendency. Last week amidst more flattening, sure enough, growth outperformed. This also captures the return profile this year for technology stocks which of course tend to be considered growth. Trading on this would be difficult as it amounts to predicting short term movements in interest rates but understanding the relationships at play here can help better address client questions.
Barron’s in noting the one way trade that has been the US equity market reported that is has been more than a year since there has been even a 5% dip, there have only been six such occurrences since 1950. Cycles have not been repealed but this one has been playing out differently. It has lasted a relatively long time (both the bull market and the economic expansion-ish) and has been marked by eroding volatility and very few corrections/dips. It will be the same outcome (bearn market at some point) but the path getting there has been different.
In several previous weekly updates we have talked about volatility in political headlines increasing but not being matched by equity market volatility as measured by the CBOE Volatility Index. In addition to the above mentioned volatility in the slope of the yield curve, WTI has become more volatile as measured by the VIX for crude oil which can be tracked through symbol OVX. Since March 1st it has increased 19% while the VIX has declined 26%, closing last week at 9.51. One risk here is some sort of Minsky-esque (reference to Hyman Minsky) moment where maybe there is not a calamitous outcome but some sort of mean reversion to normal volatility for equity prices. Clients may soon start to forget that 5-10% declines in bull markets are normal and they may forget that bear markets are normal. We can tell you first hand that clients forget about normal stock market cyclicality, potentially to their detriment.
The above chart shows a popular bank loan closed end fund in yellow (symbol removed for compliance reasons), a popular bank loan ETF in blue and the S&P 500 Index in red. Anyone looking to mitigate stock market volatility with fixed income exposure arguably isn’t getting that effect with the closed end fund. We looked at several different bank loan CEFs and saw similar results. Something that can go up low double digits with the stock market can easily go down low double digits when the stock market goes down that much. CEFs are valid way to access markets but the fixed income CEFs may not buffer volatility in the way some hope for.
Summer travel season is here, Plaid Zebra offers 9 tips for how to pack and travel with only a carry-on:
If you’re not sure you’ll need the item, leave it behind. When packing a carry-on, it is necessary to bring only the essentials, and everything else will only take up precious space in your bag.
For all the talk about his own shoe brand, LaVar Ball Says Lonzo Open To Other Shoe Deal If The Price Is Right:
Asked whether there is still a chance for a big shoe brand to sign his son, LaVar responded: “If the price is right. Quite frankly we are officially in the shoe game, and are a billion-dollar brand either way.”
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN