U.S. stock markets have been stuck in a tight range for several months. The VIX, a measure of stock market implied volatility, has been below 16% since mid-march. Historical stock volatility (standard deviation) has averaged 19% since 1926.
The S&P 500 closed Friday at 2,102 down 0.4% over the week, but only 1.4% below its record high. That brings the number of weeks without a gain or loss of more than 1% for the S&P to nine. According to Bloomberg, that’s the longest streak of calm since August 1993.
It’s different in Europe where volatility is up sharply. The Euro Stoxx index was up +4.8% last week (+3.1% in dollars owing to a weak euro).
The Shanghai index continued its plunge, off another 12% this week after a 13% drop the week before. It’s the biggest two week decline since 1996. Margin buying and leverage can only take you so far…eventually valuation (and rational thinking) will win out.
Meanwhile the yield on the 10 year Treasury jumped over 20 basis points to close at 2.47%. In contrast to U.S. stocks, bond volatility as measured by the MOVE index has soared of late as investors grapple with historically low rates and the likely timing of Fed rate hikes.
Greece is hopeless, but not serious is how one analyst describes the plight of the debt stricken nation as it struggles to meet a June 30 payment deadline. Greek savers continue to pull their money from local banks which are being sustained by emergency liquidity funds from the European Central Bank. Negotiators will meet Saturday in a last ditch effort to hammer out a deal.
Brian Westbury at First Trust notes Greece is Detroit, Not Lehman. That sounds right. Greece is very small and it’s problems well known. It would seem unlikely that a default by Greece would have major repercussions in Europe.
The U.S. Senate passed legislation that will give President Obama “fast track” authority that allows him to submit trade deals to Congress for an up-or-down vote without amendments. The WSJ notes “negotiators have said that process is crucial to completing the 12-nation trade deal with countries around the Pacific Ocean, known as the Trans-Pacific Partnership.” This is good news for the markets.
Wells Fargo: sums up the recently released CBOs long term federal budget forecast with “Long Term Fiscal Outlook Remains Bleak.” The nation’s fiscal path is unsustainable (growing entitlements and interest on the debt) while congress remains focused on short term patches.
WSJ: Fed watchers can mark their calendars with the following dates: July 2, July 8 and July 15. During that span of 13 days next month, the Labor Department will release its next jobs report, minutes of the Fed’s last policy meeting will be released and Fed Chairwoman Janet Yellen will begin two days of testimony presenting the central bank’s semiannual report to Congress.
WSJ: Inflation undershoots target. The personal consumption expenditures price index, which is the Fed’s preferred inflation gauge, rose a seasonally adjusted 0.3% from April, the Commerce Department said Thursday. It was the biggest rise in more than two years and largely reflected increased prices for energy, including gasoline. Food prices were flat, and prices excluding food and energy ticked up 0.1%. Still, for the 37th consecutive month, annual inflation undershot the central bank’s 2% target.
The markets will be closed next Friday and so will APCM. We will take a break and skip the EYE and the Financial Planning blog next week.
Next Saturday, Anchorage celebrates the 4th of July with a parade and festival on the Park Strip. I have been asked to read the Declaration of Independence at 1 PM. I’ll do my best!
Have a wonderful 4th everyone!
Jeff Pantages, CFA®
Chief Investment Officer