Back to Where We Started
The major equity benchmarks closed last week mostly flat after drops on Thursday and Friday largely erased earlier gains. The large-cap S&P 500 managed to reach its highest level since last July on Wednesday before falling back. The gains also lifted the S&P to a point roughly 15 percent above the lows it reached in February. But it also suffered its first one percent down day in 45 sessions on Friday when the VIX popped 17 percent, the highest daily gain since January 7 -- 107 trading days ago. The tech-heavy Nasdaq underperformed to record a loss on the week. The smaller-cap benchmarks were also relatively weak.
The strong start to the week appeared to be due, at least in part, to reassuring comments from Fed Chair Janet Yellen. In a highly anticipated speech on Monday, Yellen confirmed her faith in the strength of the labor market and did not waver in her view that the Fed was set on a path of gradually raising short-term interest rates. However, she did concede that economic risks exist and that tighter policy is not on a preset course.
Some favorable macroeconomic trends might have also boosted market sentiment early in the week. Crude oil prices rose above $50 per barrel for the first time in eight months at midweek. Energy stocks had a mixed reaction, however, with traders seeming to swap out of exploration and production firms into services shares. The falling U.S. dollar also helped materials and industrials shares, and good news on weekly jobless claims and job openings may have helped ease fear over the labor market sparked by the previous week's odd monthly payrolls report.
Global economic worries resurfaced late in the week, however, pushing stocks lower.
Wall Street opened sharply lower on Friday morning, following a big drop in European markets. European stocks were under pressure pretty much all week as energy, commodity, and financials shares weighed on markets. Questions about the strength of the world's economies, particularly the U.S., and growing fears that the UK would vote to leave the European Union appeared to drive a global rise in risk aversion. A drop in oil prices below $50 per barrel at the end of the week also seemed to weigh on sentiment.
The benchmark 10-year U.S. Treasury note yield fell last week. This decline seemed to be driven more by sinking global yields than by economic data. High yield bonds produced a strong gain last week amid positive flows, a healthy risk appetite, and steady interest in new deals. Energy credits were bolstered by the recent oil price rally (before Friday), and spreads across most below investment-grade sectors narrowed. The ECB started buying corporate bonds last week, pushing some European yields into record negative territory.
Charts of the Week
The following recent articles are well worth your time.
Explaining Investing in Ways That Make Sense (Morgan Housel)
11 signs that you own the right investment portfolio (Jonathan Clements)
Alpha Wounds: Lack of Independent Judgment (Jason Voss)
The Upside of Academic Finance (Ben Carlson)
Rob Arnott: Capital Markets Expectations (Rob Arnott via The Big Picture)
What you're not hearing about George Soros today (Josh Brown)
Mount Investmore (Phil Huber)
Book of the Week
So called "experts" make erroneous forecasts all the time --such forecasts are ubiquitous in our world and especially in the media. Yet the vast majority of these pundits are wrong much more often than they are right. In this insightful book, Philip Tetlock explores what constitutes good judgment in the prediction of future events and looks at why experts are so often wrong in their projections. He notes a perversely inverse relationship between the best scientific indicators of good judgment and the qualities that the media most prizes in pundits -- most prominently the single-minded determination required to prevail in ideological combat. He also provides a good model for evaluation expert opinion. Everyone should read Philip Tetlock's excellent Expert Political Judgment.
Fact of the Week
The price appreciation of the S&P 500 has been roughly 65 percent over the past ten years (that performance measure doesn't include dividends, of course). Only one industry sector of the index is down over that period. It's not Energy; that group is actually up 23 percent on a price basis. Nor is it Materials, up 48 percent. Those levels underperform the index but they're still in positive territory. The right answer is Financials. Over the last ten years S&P 500 Financials are down 29 percent. Not too that that sector includes REITs, which are up 28 percent on a price basis (and more with dividends) over the last decade. Since REITs are more than 10 percent of the Financials group over the period, traditional banks/brokers/insurance/card companies are down more like 33 percent over the last ten years. That oddity will no longer be possible come September as REITs will be separated from the Financials and will become the S&P 500's 11th sector.
Quote of the Week
"A moderate addiction to money may not always be hurtful but when taken in excess it is nearly always bad for the health."
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