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June 11 2014

“Is there any point to which you would wish to draw my attention?”
“To the curious incident of the dog in the night-time.”
“The dog did nothing in the night-time.”
“That was the curious incident,” remarked Sherlock Holmes.”

Sometimes, it’s what doesn’t happen that deserves our attention. In the case of what’s missing in U.S. markets, according to The Economist, is volatility:

“Certainty about monetary policy has stripped volatility out of bond yields which in turn has drained a major source of uncertainty out of stock prices. At root, volatility simply represents uncertainty about the value of an asset’s cash flows, so when volatility falls, the risk premium required to hold the asset also falls, driving price-earnings ratios for stocks up and bond yields down… I do worry that by squeezing out short-term volatility, we may be storing up long-term volatility.”

In the United States, the CBOE Volatility Index (VIX), a.k.a. the fear gauge, has been falling for some time. According to Reuters, some experts believe when the VIX trades below its historic averages, the market is getting toppy and investors may be in denial. Only time will tell whether this view has merit. In the meantime, let’s review what has happened so far during the second quarter of 2014:

Strength in America
The U.S. Federal Reserve continued to goose the U.S. economy with accommodative monetary policy. Toward the end of this quarter, the Fed was buying $45 billion of Treasury and mortgage-backed assets each month rather than $85 billion as it did prior to tapering. At this rate, its quantitative easing efforts will end in late fall or early winter.

The U.S. economy appeared to rebound after contracting slightly during the first quarter of 2014. Better-than-expected economic data late in this quarter spurred optimism in markets across the globe.

Redirection in Russia
Tensions between Russia and Ukraine remained high. At the St. Petersburg International Economic Forum, Russian President Vladimir Putin told CNBC, “The standoff with Ukraine and the threat to European gas supply are ‘not due to Russia but to the situation in the Ukraine, which abuses its position.'”

Meanwhile, one of Russia’s large state-backed energy companies signed a $400 billion, 30-year contract to supply gas to China. Reutersreported China received a significant discount on the deal which was priced at about $10 to $10.50 per million British thermal units (BTUs). This is well below the current price level of around $13 per million BTUs.”

Not long after that deal was announced, Russia, Belarus, and Kazakhstan signed documents creating a Eurasian Economic Union (EEU) late in this quarter. The Diplomat reported Russia was pushing for a common parliament, common passport, and common currency within the EEU; however, the other member states preferred a purely economic union. According to Reuters, forming closer ties between Russia and China is at the heart of the EEU.

Slow growth in China
China missed its government’s gross domestic product (GDP) growth target for the first quarter of 2014. The bull’s eye was 7.5 percent growth. China delivered 7.4 percent. The Chinese government took measures to encourage growth, and The World Bank recently reported China’s growth is expected “to slow to 7.6 percent in 2014, and 7.5 percent in 2015, from 7.7 percent in 2013.” The report said economic growth could be slower due to high levels of local government debt, issues in real estate markets, or economic weakness in developed countries.

  • Data as of 6/6/141- WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)1.4%5.5%20.2%0.14915.7%5.5%
  • 10-year Treasury Note (Yield Only)2.6N/A2.13.03.94.8
  • Gold (per ounce) -0.23.8-10.9-75.712.2
  • DJ-UBS Commodity Index-0.16.31.5-6.71.2-1.1
  • DJ Equity All REIT TR Index1.717.011.312.621.610.0

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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