Market On Cruise Control

Major US stock market indices were largely flat this week. The tech-ladened Nasdaq 100 fared a bit worse than the large cap S&P 500 which is a bit surprising considering many of the biggest components had blow out earnings this week. Amazon, Apple, Google, Facebook, and Microsoft all reported this week and all surpassed expectations. However, Apple and Microsoft finished the week lower indicating that perhaps the market had even bigger expectations than analysts did.

For the month, all indices posted terrific returns, led by the Nasdaq 100 and S&P 500 finishing up over 5%. The small cap Russell 2000 was a laggard for the month, finishing up only 1.8%. For the year to date, the S&P 500 is up over 12% and seems overdue for a correction. Currently, the S&P sits more than 7% above its 100-day moving average. In the past, major deviations from longer term moving averages can be foreshadow mean reverting future moves. This isn’t to say that the end is nigh, it is just to say that the pace of returns that we’ve seen since the beginning of the year may stall out for a bit. This would also coincide with what is traditionally a seasonally slower time for the market.

One benefit that the stock market has seen over the last 6 weeks has been the stabilization of interest rates. After rising from 0.50% in August to 1.75% in early March, the benchmark 10-year US Treasury yield has fallen slightly to 1.62%. Markets seem to ok with slightly higher yields, but what they don’t want to see is runaway rates. But after hearing this week from President Biden’s spending proposals it’s hard to imagine these initiatives passing without impacting Treasury yields.

Either way, the market and the economy seem very encouraged by the near-term outlook. Recently, we have seen the Cboe Volatility Index (VIX) fall and stay below 20. Typically, readings above 20 represent periods of greater uncertainty and turmoil. The index rose above 20 last February and had stayed above that level until a few weeks ago. The index now sits closer to its longer-term mid-range, hovering around 16. A consistently decreasing VIX index is illustrative of a market more comfortable with its future assumptions. However, the VIX can be a bit like finding Goldilocks’ porridge, too high and the market remains jittery, too low and the market shows signs of complacency. A VIX at 15-16 seems to be a Goldilocks scenario as it is neither too complacent nor too “freaked out.”

Thanks for reading,

Zach and Dave

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