This is the way the quarter ends – with a central bank scare. Weekly Commentary for July 3, 2017
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 avorable. 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.
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