AdvisorShares Weekly Market Review – Week Ending 7/28/2017
Highlights of the Prior Week
VIX Below 9?
The broad equity market had something of a dispersion last week. The volatility was subdued as the S&P 500 fell two basis points after making a new high earlier in the week, the NASDAQ was down 0.21% and the Russell 2000 gave up 0.44%. The dispersion came from the 1.15% lift for the Dow Jones Industrial Average which was attributable to a huge bump in earnings for industrial sector companies in the Average.
The GDP print for Q2 was of course strong at 2.6%, the revision to Q1 showed weakness and inflation as measured by the core personal consumption deflator was only up 1.5%. The FOMC met last week, kept rates on hold and set the expectation for balance sheet reduction to proceed. The situation the FOMC faces is complicated. It kept rates at crisis levels long past the actual crisis, growth hasn’t gotten close to what most would consider as normal from previous recoveries/expansions, it met its employment objective (all due respect to the underemployment argument) but can’t seem to get there with inflation (all due respect to criticism of how inflation is calculated). One argument for raising rates has been to give room to cut should another crisis happen or just a regular ole recession,the FOMC now has that room.
The yield on the Ten Year US Treasury Note backed up five basis points to 2.28%. Arguably the events of the week were more volatile than the note’s reaction in trading. The market can be reasonably certain what the FOMC will do but the ten year is trading like it doesn’t know what to do with that certainty as the yield has found a home of late between 2.20% and 2.40%.
There were of course a lot of very sensational headlines out of Washington last week ranging from firings to congressional dysfunction and for fun, a profane tirade. It remains difficult to see how much is going to get done on too many fronts but we acknowledge the theory that tax reform has a better shot of happening due to the failures in trying to work on healthcare. We’ve all heard the heuristic that political gridlock is good for equities and even if the political posturing is different (or maybe it isn’t), the gridlock might be the same.
Gold has rallied smartly over the last three weeks tacking on about 4% but much of that could be attributable to simple dollar weakness. West Texas Intermediate Crude put in a strong showing with large gains on Tuesday and Friday in an attempt to take back the $50 level (not quite there yet).
The VIX Index spiked on Thursday and was up on the week despite backing off on Friday but the interesting thing is that it spent a few minutes below 9. See more on the VIX below but the trend of increased political volatility being met with decreased market volatility continues.
The Barron’s Striking Price column made a sort of tail wagging the dog argument about VIX-related exchange traded products causing a distortion in the market. The concern is that a large single day spike in the VIX (more specifically the futures that the funds use) could cause a repositioning on the funds’ part that would cause an “acceleration event” that pushes prices down even more and volatility higher.
We would never underestimate the market’s ability to panic and while the scenario is of course plausible, it is not obvious that something that has never happened before be so easily predicted by one random article. The next panic will likely be caused by something else.
There’s a total solar eclipse coming August 21st and NASA has all the info:
Everyone in the contiguous United States, in fact, everyone in North America plus parts of South America, Africa, and Europe will see at least a partial solar eclipse, while the thin path of totality will pass through portions of 14 states.
There’s a bit of an odd dust up going on between the Boston Red Sox players led by David Price and part time TV analyst, hall of fame pitcher Dennis Eckersley. Price spoke out in defense of Eduardo Rodriguez after Eckersley spoke critically about Rodriguez’ rehab start in Pawtucket, RI.
“If Eck was around, he’d know who we are,” Price told reporters. “He’s never in the clubhouse. Mr. Remy is always in here. [Play-by-play announcer] Dave O’Brien is always around. Mr. [Mike] Timlin, on the road trip, was always in the clubhouse. He’s the one guy I’ve seen in my career that doesn’t ever show his face in the clubhouse. There’s a reason behind that.”
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ESPN, NASA