Market performance: Divergence increasing between U.S. stock and bond markets

On this week’s Market Week in Review, Senior Investment Strategist Erik Ristuben was joined by Todd LaFountaine, Program Director, Advisor Insights. The two dug into the performance difference between U.S. equities and the U.S. bond market. Ristuben noted that the S&P 500® is up about 5.5% year over year as of Feb. 24, 2017, and that the CBOE® Volatility Index, known as the VIX, shows a very low level of volatility in U.S. equities. He added that the U.S. equity market seems to be buying into the strong economic news and into the potential benefit of the Trump administration’s trade and regulatory policies.

The 10-year U.S. bond yield, on the other hand, has been range-bound between 2.3% and 2.5% in 2017. Ristuben noted that the bond market is typically more macro-oriented than the equity market and is in more of a wait-and-see mode. “The equity market is drinking the Kool-Aid right now. I don’t think the bond market is completely doing that.”

A strong and stable Eurozone

It was another week of strong economic data out of Europe. The Eurozone’s Purchasing Managers' Index--an indicator of the economic health of the manufacturing sector—hit  a 70-month high, according to Ristuben. He stated, “The European economy appears to be doing well and we think the stock market is going to catch up.”

The Fed shows concern over a complacent market

New comments came from the U.S. Federal Reserve this week, indicating a patient approach to rate increases. Regarding the timing for increases, Ristuben said, “Most people—ourselves included—have taken March off the table.” Instead, Russell Investments’ strategists believe the first of two potential 2017 increases will likely occur in May or June.

Ristuben also focused on the Fed’s comments regarding the low market volatility to date in 2017. “The Fed doesn’t like it when most of the market is on one side of the trade. So when most of the market is expecting positive things, they get a little concerned.They’d rather have a much more open marketplace of ideas and have the risks balanced a little bit more.”

Watch the video now.