The S&P 500 dropped from its December high of $2100 all the way down to $1810 in February before catching a bottom. That 13.8% drop was then followed by a rapid increase just in the last month, leaving stocks down only 2.6% on the year. There has been a lot of back and forth regarding analyst expectations for the US and global economies that have been driving the market volatility. In January, the outlook for China was very pessimistic, with beliefs that China was painting a rosier picture of their economy than was actually true. That belief then had a spill-over effect into US markets. More recently, although Moody’s rating service has officially downgraded their outlook towards China to negative, the US economy has produced better than expected economic figures, boosting equity prices in the US.
Simultaneously, fear caused a flight to quality in the US treasury market, and the 10-year yield reach a low of 1.57%, the lowest level since February of 2015. Last Friday, the employment report showed higher than expected job creation, acting as a bit of validation that the US economy has thus far remained somewhat distanced from global economic concerns. As such, the strong report pushing the 10-year yield back up to 1.92% just yesterday. From a technical standpoint, the current short-term range is from 1.78% to 2.00%.
The Fed remains optimistic about the US economy, and still expects to raise interest rates gradually this year, as well as into 2017. Inflation has consistently been below the Fed’s target, but the Fed continues to point towards falling oil and commodity prices as being the culprit, with that expected to reverse course. The price of a barrel of oil reached a low of roughly $27, but has increased by 40% in the last month.
The final major story dominating headlines is the US presidential race. On the democratic side, Clinton continues to earn more delegates than Sanders, despite a stronger showing by Sanders recently. On the Republican side, Trump continues to sail towards the nomination but pressure from the anti-Trump camp is mounting, with a brokered convention appearing more and more as though it will be the best chance to block Trump from the nomination. However, if trump can acquire at least 51% of the delegates prior to the convention, there won’t even be a contest.
Eric Swanson, CFA