Broker Check

Last Week’s Economic/Market Summary – January 7, 2019

January 08, 2019

Data

U.S. equity benchmarks rose last week across the board.[1]
The S&P 500 gained 1.86% as increased volatility continued.1
The small-cap tracking Russell 2000 led to the upside with a gain of 3.2%.1
S&P 500 sub-sectors were mostly positive last week.
Consumer Discretionary & Energy led to the upside.1
Utilities & Real Estate were once again the only negative sectors on the week.1
The CBOE Volatility Index (VIX) declined 24.5% to end the week at 21.38.1

US Treasury yields moved mostly lower across the maturity curve.
The 10yr US Treasury hit a multi-month low yield of 2.55% last week.1
Foreign bond yields were mixed in Europe & lower Asia.1


Commodities as an aggregate asset class gained 3.5% last week.1
WTI Crude gained 5.8%.1
Gold gained 0.20%.1
The US Dollar index was mostly flat last week.


In our opinion, U.S. economic data was mixed last week.
Manufacturing activity gauges are weakening.1
Jobless claims jumped higher in the most recent data.1
Lower mortgage rates failed to increase home buying in the latest data.1


An index of equities outside the U.S. (MSCI EAFE) gained more than its US peers.1


Conclusion

US equity indices bounced higher last week as very volatile trading continued.
The S&P 500 gained 1.86% while the MSCI All Country World Index was up 0.94%.[2]
The growth oriented Nasdaq (tech) & Russell 2000 (small-caps) led to the upside with gains of 2.34% and 3.20%.2
The main measure of volatility in stocks, the VIX index, dropped over 24% last week.2
We believe this is as a result of traders bringing down their exposure to the VIX contract.
Interesting note - As a result of the gov’t shut down, the weekly futures data we use to monitor institutional investors’ positioning is not being made available.
While the volatility experienced over the last several months is much higher than we’ve seen for an extended period in several years, we’d like to point out that it’s only slightly higher than the VIX Index’s average level since the volatility gauge was created in 1990.
S&P 500 sub-sectors were mostly higher on the week.
Energy led to the upside with a gain of almost 5% as the sector bounced higher with WTI Crude oil prices.2
As discussed recently, we believe the overall market could be trading with oil prices as a major catalyst.
Traditionally defensive sectors led to the downside as the only negative performers last week. (Utilities & Real Estate)2
After significant outperformance since October, Utilities have now come under rapid & significant pressure over the last 3 weeks.
US Treasuries saw the yield curve flatten last week.2
We will be watching closely to see if the recent lows in the 2yr/10yr spread is broken or if in fact the yield curve continues to steepen.
IF the latter steepening scenario happens, we believe it’s important to watch whether this is led by rising long-term yields or by the shorter maturities seeing their yields drop.
In our opinion, the recent decline in future inflation expectations to levels not seen since before the 2016 presidential election have been a major driver to the 10/30yr maturity Treasury yields.
As discussed last week, the market’s current expectations are pricing in zero Fed rate hikes in 2019.2
We believe this is as a result of Fed chair Powell’s comments last week that seemed to walk back his more rigid December comments. This also sent equities exploding higher on Friday.
oWith Friday’s monthly employment data coming in much higher than expectations,2 we’ll be watching closely to see if the market’s expectations for rate hikes gets too far apart from what the Fed actually will do given the economic data.
Ryan A. Mumy, CFP®, AIF®
Chief Investment Officer
Contact:828/855-9400 or info@CIASonline.comor rmumy@bloomberg.net

[1] Source: Bloomberg – 1/4/2018

[2] Source: Bloomberg – 1/4/2018