Stocks are benefiting from tailwinds
Fueled by strong corporate profits and favorable economic data, the major U.S. stock indexes recently reached fresh record highs. “Animal spirits” and momentum-based trading have generally been propelling stocks to above-average valuations, helped by expectations for a faster pace of U.S. economic growth.
A surprisingly hawkish Fed
Janet Yellen seems determined to raise interest rates faster than her commentary last December seemed to imply, with forecasts of a rate hike in March climbing from the start of this year. The odds of a March rate hike increased further still after Yellen’s congressional testimony last week. If anything, this seems to signal that the U.S. economy is increasingly stable amid a solid labor market and even early indications of a pickup in inflation.
Volatility around the corner
Many traditional volatility metrics have fallen to all-time lows since the election. In spite of this, we think that an increase in volatility is only a matter of time. Brexit and the related effects on broader Europe, potential shifts in U.S. trade policies, and the timing and extent of U.S. tax reform and infrastructure spending are among the many unknowns that could ignite market volatility. Nevertheless, we continue to favor the Financials, Energy, and Industrials sectors over the Utilities and Telecommunications sectors, as well as over retail industries.
The iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX) was trading at $17.72 per share on Tuesday afternoon, up $0.18 (+1.03%). Year-to-date, VXX has declined -30.54%, versus a 5.60% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Charles Schwab Investment Management.