October 2,
2017
The
Markets
A lot happened during the third quarter of 2017, but
not much changed.
The bull
market in U.S. stocks continued to charge ahead. Traditional
measures of valuation continued to suggest the market is overvalued, but some
analysts argued it’s different this time. The
Economist explained:
“The
current [cyclically-adjusted price-to-earnings] ratio of 31 suggests that stocks
are about 50% over-valued – a figure that has only been exceeded in the past 60
years during the dot-com bubble. Bulls argue that the S&P 500’s
constituents can justify this heady valuation. Big American companies are
wielding increased market power, enabling them to earn outsized profits at the
expense of America’s customers.”
The bull market in U.S. bonds continued.
Interest rates on 10-year Treasury bonds were lower at the end of September
than they were at the start of the year, despite the Federal Reserve increasing
rates in March and June. The Fed also has indicated it will soon begin to
unwind its balance sheet, which includes about $4.5 trillion in Treasury bonds,
mortgage-backed securities, and government agency debt.
Geopolitical
tensions remained high, but investors were impervious to the potential
effect of various conflicts on stock and bond markets. In August, Barron’s wrote:
“The biggest surprise of 2017 remains that
geopolitical risk continues to not matter. Until Monday, North Korea’s nuclear
missile program had again faded into the background as just another high
impact/low probability risk with no discernible effect on market sentiment.
Brexit, the changes in leadership roles in China after the 19th National
People’s Congress, the possibility of a United States-China trade war, and the
unpredictable nature of the Trump presidency are not weighing on stocks.”
The CBOE
Volatility Index (VIX) keeps plumbing historic lows. The VIX reflects investors’ expectations for market
volatility in coming months. The lower the Index reading, the lower volatility
expectations are. The historic average for the VIX is about 19.
During 2017, the number of days on which the VIX finished
below 10 – suggesting investors are exceptionally calm – increased
significantly. In early June, the VIX had closed below 10 just 14 times since
1990. Six of those closes had occurred in 2017. By the end of September, the
VIX had closed below 10 on 32 days since 1990 and 24 times in 2017.
We’re still
waiting for inflation to move higher.
At the end of the quarter, inflation appeared to be heading the wrong way. The
core Personal Consumption Expenditures (PCE) index, which is the Federal
Reserve’s favorite measure of inflation, came in at 1.3 percent,
year-over-year. That’s its lowest level since October 2015, reported Barron’s. The Fed’s goal is to have
inflation at 2 percent. It has raised rates during 2017 in anticipation of
higher inflation rates, but those higher rates have yet to materialize.
Data as of
9/29/17
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
|
|
Standard & Poor's 500 (Domestic Stocks)
|
0.7%
|
12.5%
|
17.1%
|
8.4%
|
11.8%
|
5.0%
|
|
Dow Jones Global ex-U.S.
|
-0.6
|
18.7
|
16.5
|
2.7
|
4.9
|
-0.9
|
|
10-year Treasury Note (Yield Only)
|
2.3
|
NA
|
1.6
|
2.5
|
1.6
|
4.6
|
|
Gold (per ounce)
|
-0.9
|
10.7
|
-2.7
|
1.7
|
-6.4
|
5.6
|
|
Bloomberg Commodity Index
|
-0.5
|
-3.5
|
-0.9
|
-11.2
|
-10.8
|
-7.2
|
|
DJ Equity All REIT Total
Return Index
|
0.7
|
6.1
|
2.1
|
10.1
|
10.2
|
5.8
|
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg
Commodity Index returns exclude reinvested dividends (gold does not pay a
dividend) and the three-, five-, and 10-year returns are annualized; the DJ
Equity All REIT Total Return Index does include reinvested dividends and the
three-, five-, and 10-year returns are annualized; and the 10-year Treasury
Note is simply the yield at the close of the day on each of the historical time
periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com,
London Bullion Market Association.
Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not
applicable.
the case of the swirling Euros. In mid-September, local authorities in Geneva,
Switzerland were investigating an unexpected deposit. Reuters reported:
“…the
first blockage occurred in the toilet serving the vault at [a] bank…in Geneva’s
financial district, and three nearby bistros found their facilities bunged up
with 500-euro notes a few days later…The cash was confiscated during the
investigation and it was unclear who would get it if it was found to be lawful.
There was no immediate reason to think it was dirty money...”
Whoever
was responsible for flushing about $100,000 worth of 500-euro bills may have
jumped the gun. The €500 note will be discontinued by the European Central Bank
because authorities suspect it has been used to facilitate illegal activities,
but production continues until the end of 2018.
The
perpetrator hasn’t committed a crime, reported Bloomberg. While it’s illegal to mutilate or deface bills in the
United States, that’s not the case in Switzerland. The European Commission isn’t concerned when small amounts of euro are damaged.
Its rules for legal tender state:
“The
destruction of small quantities of euro banknotes or coins by an individual
should neither be prohibited nor penalized. The justification for the
non-prohibition is the fact that the lawful owner of a banknote should be able
to do what he/she wants with his/her own good as long as there is no impact on
third parties.”
Why investigate if there is no crime? There’s nothing
like a good mystery to occupy the mind!
Weekly
Focus – Think About It
“The problem with putting two and two
together is that sometimes you get four, and sometimes you get twenty-two.”
--Dashiell Hammett,
American author
Best regards,
Womack
Investment Advisers, Inc.
WOMACK INVESTMENT ADVISERS, INC.
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Phone (405) 340-1717 - Toll Free (877) 340-1717
Website: www.womackadvisers.com
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*
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Representative or the Representative’s Broker/Dealer, and should not be
construed as investment advice.
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not affiliated with the named broker/dealer.
*
Government bonds and Treasury Bills are guaranteed by the U.S. government as to
the timely payment of principal and interest and, if held to maturity, offer a
fixed rate of return and fixed principal value.
However, the value of fund shares is not guaranteed and will fluctuate.
*
Corporate bonds are considered higher risk than government bonds but normally
offer a higher yield and are subject to market, interest rate and credit risk
as well as additional risks based on the quality of issuer coupon rate, price,
yield, maturity, and redemption features.
*
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities
considered to be representative of the stock market in general. You cannot
invest directly in this index.
*
All indexes referenced are unmanaged. Unmanaged index returns do not reflect
fees, expenses, or sales charges. Index performance is not indicative of the
performance of any investment.
*
The Dow Jones Global ex-U.S. Index covers approximately 95% of the market
capitalization of the 45 developed and emerging countries included in the
Index.
*
The 10-year Treasury Note represents debt owed by the United States Treasury to
the public. Since the U.S. Government is seen as a risk-free borrower,
investors use the 10-year Treasury Note as a benchmark for the long-term bond
market.
*
Gold represents the afternoon gold price as reported by the London Bullion
Market Association. The gold price is set twice daily by the London Gold Fixing
Company at 10:30 and 15:00 and is expressed in U.S. dollars per fine troy
ounce.
*
The Bloomberg Commodity Index is designed to be a highly liquid and diversified
benchmark for the commodity futures market. The Index is composed of futures
contracts on 19 physical commodities and was launched on July 14, 1998.
*
The DJ Equity All REIT Total Return Index measures the total return performance
of the equity subcategory of the Real Estate Investment Trust (REIT) industry
as calculated by Dow Jones.
*
Yahoo! Finance is the source for any reference to the performance of an index
between two specific periods.
*
Opinions expressed are subject to change without notice and are not intended as
investment advice or to predict future performance.
*
Economic forecasts set forth may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
*
Past performance does not guarantee future results. Investing involves risk,
including loss of principal.
*
You cannot invest directly in an index.
*
Stock investing involves risk including loss of principal.
*
Consult your financial professional before making any investment decision.
*
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Sources:
https://www.economist.com/blogs/graphicdetail/2017/09/daily-chart-10?zid=295&ah=0bca374e65f2354d553956ea65f756e0 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/10-02-17_TheEconomist-The_S%26P_500_Breaks_Another_Record-Footnote_1.pdf)
http://www.barrons.com/articles/whats-driving-asias-stock-market-rally-1504227382 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/10-02-17_Barrons-Whats_Driving_Asias_Stock_Market_Rally-Footnote_4.pdf)
http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-historical-data (Click on ‘VIX data for 2004 to present (Updated
Daily)*’ to review the downloaded data in an Excel spreadsheet)
http://www.barrons.com/articles/inflation-falls-again-and-by-more-than-expected-1506691462 (or go to https://s3-us-west-2.amazonaws.com/peakcontent/+Peak+Commentary/10-02-17_Barrons-Inflation_Falls_Again_and_by_More_than_Expected-Footnote_7.pdf)
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