Volatility Hits All Time Low, US Stock Markets Hit All Time Highs

Weekly Economic Updates – July 28, 2017

  • U.S. stocks reached another record high last week, the 29th new “high” so far this year. Although the week saw the broad, S&P 500 Index end the week flat, it did reach another high mid-week
  • The narrowly defined, large-cap DJIA on the other hand, rose by more than 1% this week and is in double-digits for the year, fueled by positive corporate earnings results
  • With about half of the companies in the S&P 500 having announced their second-quarter results, earnings are up 9.1% year-over-year
  • This week did provide some notable exceptions to positive earnings results, with Amazon missing expectations. The giant retailer saw its stock price hammered by almost 5% soon after the announcement, but then rallied to finish down by about 2.5%.
  • Starbucks was another disappointing name, as they missed top-line estimates, sending its stock price plummeting over 9% to its lowest level in about six months
  • The Federal Reserve released its policy directive mid-week and reaffirmed market expectations that the Fed will slowly pare back its balance sheet, which will likely ease rates higher
  • The yield on the US 10-year note rose six basis points to 2.30% on the week
  • The price of West Texas Intermediate crude oil rose over $3 a barrel to end the week at just under $50/barrel
  • Volatility, as measured by the Chicago Board Options Exchange Volatility Index, continues to reside at historically low levels

Weekly Market Performance

 CloseWeekYTDDJIA21,8301.2%10.5%S&P 5002,4720.0%10.4%NASDAQ6,375-0.2%18.4%Bonds*$109.70-0.2%2.8%10-Year Treasury Yield2.29%0.05%-0.16%*Source: Bloomberg. Bonds represented by the iShares Core US Aggregate Bond ETF

Volatility at Historically Low Readings

Volatility, as measured by the Chicago Board Options Exchange Volatility Index – the VIX – continues to reside at historically low levels and fell to an all-time low last week. The VIX Index dropped to a reading of 9.4 last week. And to keep that in perspective, the 20-year average is 20.7.

While past performance doesn’t always indicate future results, historically when volatility has fallen 50% below its long-term average, it then rises by an average of 25% over the following three months. This of course won’t signal an end to this long-running bull market, but most investors do expect increased volatility toward the end of the summer and into the fall, with the occasional short-term pull back in equities as well.

More Stock Market Highs, Supported by Positive Earnings

US stocks hits another record high this week, which happens to be the 29th new high so far this year. And markets are up about 12% in the 4 months following Trump’s election and in double-digits for the year so far.

While many might point to market optimism fueled by Trump’s pro-growth agenda – tax reform, infrastructure spending, and deregulation – it’s important to pay attention to company earnings individually and across the the board. And the results so far this year are encouraging.

According to Thomson Reuters, with just about 50% of companies in the S&P 500 Index having reported so far, second-quarter earnings are expected to rise 10.7% versus Q2 2016. Excluding the energy sector, the rise is 8%. Equally, or maybe even more importantly, revenues are expected to climb 4.9%.

Remembering again that past performance doesn’t guarantee future results, it is interesting to note that since 1989, in years when S&P 500 earnings grew by more than 5%, the market return was positive in 89% of those years.

Macroeconomic Data is Important Too

The week’s economic data was mixed and for the most part, didn’t really impact stock markets. Existing home sales declined in June, most likely held back by low inventories, while new home sales and housing prices are rising. Supported by rising home prices, the Conference Board’s gauge of consumer confidence increased.

Less positive news came from the manufacturing sector, with core capital goods orders contracting slightly in June. On Friday, the Commerce Department released its initial estimate of second-quarter growth, which showed gross domestic product expanding at an annualized pace of 2.6%, slightly below expectations, but still at very solid levels.