This is the way the quarter ends – with a central bank scare.
Central bankers are stodgy. They speak carefully. For many, reading the words ‘Federal Reserve’ is enough to cause boredom to set in and web surfing to ensue.
Last week, though, the European Central Bank and Bank of England cracked the ‘open secret’ (i.e., central banks will provide less stimulus and increase rates at some point), and investors did not like what they heard.
Central bankers were quick to say they didn’t necessarily mean what people had heard, but the rumor of less accommodative monetary policy was already moving markets. Barron’s wrote:
“But make no mistake: Last week was a game changer. Federal Reserve Chair Janet Yellen fretted about the high level of asset prices, the Bank of England’s Mark Carney hinted at a rate hike, and Mario Draghi suggested the European Central Bank could be nearing the end of its bond buying…The market didn’t take it sitting down. Long-term Treasury yields surged, resulting in a wider spread off of short-term bond yields.”
A wider spread between short- and long-term Treasuries could be good news. The Federal Reserve Bank of Cleveland explained:
“The slope of the yield curve – the difference between the yields on short- and long-term maturity bonds – has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions…”
Central bankers comments affected U.S. stock markets, too. The technology sector lost its allure, while the possibility of rising interest rates made the financials sector more attractive. It didn’t hurt that all major institutions passed the Fed’s stress tests for the first time. That could translate into share buybacks and higher dividends, reported Financial Times.
There were some notable statistics during the second quarter of 2017. For instance:
Investors were preternaturally calm
Throughout second quarter, investors have been confident the Standard & Poor’s 500 Index would offer a smooth ride. The CBOE Volatility Index (VIX), a.k.a. the fear gauge, has only closed below 10 sixteen times; seven occurred during the second quarter of 2017.
Consumer sentiment was quite positive
Consumers were feeling highly optimistic throughout the quarter. In June, the University of Michigan Consumer Sentiment Survey reported, “Although consumer confidence slipped to its lowest level since Trump was elected, the overall level still remains quite favorable. The average level of the Sentiment Index during the first half of 2017 was 96.8, the best half-year average since the second half of 2000…”
Investor sentiment shifted into neutral
Last week, the number of investors who were neutral (rather than bullish or bearish) about markets hit its highest level in a year. The AAII Blog reported:
“This year’s record highs for the S&P 500 and the NASDAQ have encouraged some individual investors, but the Trump administration’s ability (or lack thereof) to move forward on economic and tax policy remains on the forefront of many others’ minds. Also playing a role in influencing sentiment are earnings, valuations, concerns about the possibility of a pullback in stock prices, and interest rates/monetary policy.”
The U.S. economy appears to be growing, albeit slowly. Last week, the Federal Reserve Bank of Atlanta forecast real GDP (Gross Domestic Product) growth during the second quarter of 2017 at 2.7 percent.
While these data points are interesting, remember that no one can predict what the market will look like next quarter or next year. The only thing individual investors can truly control is our own behavior. You can learn more about my investment philosophy in Chapter 26 of my book Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend.
* These are the general views of Jonathan DeYoe and they should not be construed as investment advice for any individual.
* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in this index.
* All indices referenced are unmanaged. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
* Gold represents the afternoon gold price as reported by the London Bullion Market Association. The gold price is set twice daily by the London Gold Fixing Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy ounce.
* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The original “Weekly Commentary” was prepared by Peak Advisor Alliance. Jonathan DeYoe is a member of Peak Advisor Alliance and adds, subtracts and edits before publishing.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* You cannot invest directly in an index.
* Consult your financial professional before making any investment decision.
* Stock investing involves risk including loss of principal.
* “2nd Quarter Market Review”
http://www.barrons.com/articles/a-game-changing-week-for-markets-sees-nasdaq-fall-2-1498887177?mod=BOL_hp_we_columns (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/07-03-17_Barrons-A_Game-Changing_Week_for_Markets_Sees_NASDAQ_Fall_2_Percent-Footnote_2.pdf
https://www.ft.com/content/d7c47dae-5dd7-11e7-9bc8-8055f264aa8b (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/07-03-17_FinancialTimes-Second_Quarter_Ends_with_Fierce_Rotation_Away_from_Tech_Stocks-Footnote_4.pdf)
http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-historical-data (click on “VIX data for 2004 to present”)
http://www.sca.isr.umich.edu (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/07-03-17_SurveysOfConsumers-Final_Results_for_June_2017-Footnote_7.pdf)