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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.

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