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GDP Revised Down; Stocks Hit New Highs

Market Digest – Week Ending 5/30

Investors ignored a surprising drop in Q1 GDP and returned from Memorial Day Weekend in an optimistic mood. Stocks and bonds rose, with the S&P 500 closing at a new all-time high and the 10 year Treasury yield dropping below 2.5% and hitting lows for the year. Increasing expectation for some type of quantitative easing in Europe drove down global bond yields. Gold fell as the situation in Ukraine remained unstable, but did not deteriorate after the election of pro-EU Petro Poroshenko as President.

Weekly Returns:

S&P 500: 1,924 (+1.2%)
FTSE All-World ex-US: (+0.4%)
US 10 Year Treasury Yield: 2.47% (-0.06%)
Gold: $1,251 (-3.2%)
USD/EUR: $1.363 (0.0%)

Major Events:   

  • Tuesday – Pilgirm’s Pride offered $5.5 billion to acquire Hillshire Brands.
  • Wednesday – Apple completed a deal to acquire Beats Electronics for $3 billion.
  • Thursday – US Q1 GDP was unexpectedly revised down to a -1%, largely due to companies reducing inventories.
  • Thursday – The Wall Street Journal reported that U.S. authorities are pushing for BNP Paribas to pay more than $10 billion for violating sanctions against Iran, Sudan and other countries.
  • Friday – Department of Veterans Affairs Secretary Eric Shinseki resigned following criticism about access to care and tampering with official wait lists.
  • Friday – Former Microsoft CEO Steve Ballmer reached an agreement to buy the Los Angeles Clippers for $2 billion, though it still may be contested by Donald Sterling.

Our take:

Despite anecdotal evidence that investors are frightened by the new highs in the stock market, volume and volatility remain low. The VIX, which measures implied volatility of the S&P 500, has reached lows not generally seen since early 2007. And we all know what happened in 2008.

The market loves to prove people wrong, but a crash isn’t the only way the VIX could be discredited. A large upward spike would surprise even more people. With valuations slightly above historical averages almost no one is talking about a big up year. Then again, the same was true last year. And the last time before 2006-2007 the VIX was hanging around at these levels? 1995 – just before a huge run in stocks.

Central banks globally have pumped an unprecedented amount of money into circulation in the last five years. No one really knows what the long term implications will be. But higher stock prices and prolonged low interest rates are not unrealistic outcomes. A prolonged period of low volatility seems unlikely – but volatility comes in good and bad varieties.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Craig Birk leads the Personal Capital Advisors Investment Committee and serves as Chief Investment Officer. His focus is translating improvements in technology into better financial lives. Craig has been widely quoted in the Wall Street Journal, Bloomberg, CNN Money, the Washington Post and elsewhere. Prior to Personal Capital Advisors, he was a leader within the portfolio management team at Fisher Investments, helping assets under management grow from $1.5 billion to over $40 billion. Craig graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.
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