Market Observations for March 2017
After strong post-election moves, the financial markets continue to tread water. For instance as discussed in our November observations that the US 10-year treasury yield jumped to 2.37% at the end of November. The yield was 2.40% at the end of March. This is clear evidence of how informational efficient the capital markets are as they adjusted expectations given the US election results in November. Now, the market is waiting for the follow through.
While the markets mark time, we have seen some reversion or normalization in various asset classes. Consider that the US small cap indices were up ~14% in the last 2 months of 2016 but have been relatively flat for 2017 and essentially flat for March. For example, the Russell 2000 Small Cap ETF (IWM) increased 0.03% in price for March. The S&P 500 Total Return index increased 0.12% in price in March. The best performing broad index that we look at was Emerging Markets. The MSCI Emerging Markets equity ETF (EEM) was up ~6.0% in March on a total return basis while it was down 4.7% on a total return basis for the last 2 months of 2016.
As for the US economy, the GDPNow model from the Federal Reserve Bank of Atlanta, which is a real time estimate for the current inflation-adjusted GDP growth rate, is currently at 1.2% as of April 4th. This is a soft number relative to the Federal Reserve’s projection for 2017 at 2.1%. Note that in March, the Federal Reserve voted to raise the short-term Fed Funds rate to a range of 0.75% to 1.0%, and increase of 0.25%. It will still take several quarters to gauge the impact of the new administrations policies and subsequently the direction of the Federal Reserve. Note that they Federal Reserve is currently projecting a 1.4% short-term rate by the end of the year.
A last observation, the fear/complacency measures we look to take a temperature reading of the market remain on the complacent side. The 50-day price volatility of the S&P 500 ETF (SPY) remains low at 7.1% and not far removed from the record low of 5.8% (since data was available starting 10/1998). Second, the spread between corporate borrowers with credit risk and the equivalent risk free rates continues to remain low at just under 4%. The spread had increased to 8.6% in February of last year as the energy sector was under intense pressure due to falling oil prices.