January 23, 2018
Market commentary – january 2018
Returns from various stock market indices over several periods ending December 31, 2017 are shown below. The past quarter was good for stocks – REITs lagged. Over the past year, returns from stock indices, especially emerging markets, were well above longer- term averages. Over longer periods, domestic market indices were well above those of non-domestic markets, which tells us nothing about what we’ll see over the next ten years.
Yields are up at the short end in response to the Fed increasing interest rates; yields at the longer end are down a bit. Yields and bond prices are inversely related (when yields go up, prices come down and vice versa). These changing yields explain negative bond returns for short-term bonds; positive returns for bonds of longer maturities.
Today’s Yield Curve is flatter. The Fed can control only short-term rates; long-term yields generally reflect market expectations for future interest rates and inflation. Falling yields are consistent with the expectation that the Fed will have difficulty increasing interest rates down the road or reduce inflation – a precursor for a difficult economic environment, which seems inconsistent with today’s economy.