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    Markets "In a Nutshell" for May 30, 2018

    May 30, 2018

    Investment Week at a Glance

    Stocks finished mixed for the week. The Dow Jones Industrial Average was up 0.15%, the S&P 500 rose 0.31%, the New York Stock Exchange Composite (2,000 stocks) was down 0.65% and the average investors index (Value Line Index) was down 0.15%.  Foreign stocks (DJ Global ex U.S.) were down 0.26%. Bond prices were higher for the week, pushing the yield on the 10-year U.S. Treasury down 12 basis point to finish the week at 2.93%.  (Data sources: Barron’s Financial, Wall Street Journal)

     

    Both Stocks and Bonds Remain Range Bound

    In general, the markets (both stocks and bonds) are trading in a relatively narrow range with few signs of a major breakout in either direction. In the bond market, for example, the 10-year U.S. Treasury note has been moving between 2.90% and 3.10% recently. Economic data has been mixed as well: We’ve seen GDP growth that’s been solid but not spectacular, inflation that’s shown some signs of perking up but nothing serious, and limited wage gains despite a tight labor market. We continue to favor corporate credits over Treasuries, and we maintain a shorter duration profile than the Bloomberg Barclays US Aggregate Bond Index.

    We are heading toward summer, which is typically a low-volume period for the financial markets. A lack of volume can allow markets to drift higher or create air pockets that cause markets to drop suddenly. Therefore, the markets may continue to be range bound for some time.

    Future market volatility expectations rose modestly last week, as global markets fluctuated. Volatility expectations for emerging markets are significantly higher than for development markets—due largely to the strong positive correlations between the equity markets and the foreign exchange markets seen among various emerging economies recently.

     

    Global Stocks Struggle Relative to Bonds

    Global stocks suffered their worst week relative to bonds since early April, as the yield on the 10-year U.S. Treasury note fell back below the psychologically important 3% level to end the week at 2.93%. Global stock weakness was driven primarily by poor results among developed equity markets. In particular, Europe fell on slower growth and concerns over Italian politics.

    Year-to-date, however, global equities are outpacing the broad-based bond market by more than 3% (with bonds down -2% on the year). The one-year return spread between stocks and bonds stands at 13%, in stocks’ favor.

    Despite falling bond yields and rising bond prices last week, market expectations for inflation actually increased—a development that might normally cause yields to rise. Expectations for longer-term U.S. inflation are up nearly 10 basis points this quarter alone, and the Fed has indicated it is prepared to tolerate inflation above its 2% target.

    Many yield-focused strategies benefited from falling rates last week, with both long-duration bonds and U.S. REITs up by more than 2% for the week. In addition, preferred stocks were up by more than 50 basis points. However, a pullback in oil prices sent master limited partnerships down by more than 2.5%—their biggest loss this quarter.

     

    Quiz:

    What is the difference between a correction and a bear market?

    a)    There is no difference

    b)    A bear market is a 20% decline in the S&P 500 from a recent high; a correction is a decline of 10% in the S&P 500 from a recent high

    c)    A bear market is a 50% decline in the S&P 500 from its recent high; a correction is a 20% decline in the S&P 500 from its recent high

     

    Have a good week!

     

     

     

     

    Answer to quiz:

    b)    A bear market is a 20% decline in the S&P 500 from a recent high; a correction is a decline of 10% in the S&P 500 from a recent high.