Markets were mixed this week as the SPY and the VTI advanced by 0.26% and 0.33% but the VT and the AGG fell by 0.22% and 0.37%. We wrote our last market recap on May 2 and since then the SPY moved up by 1.08% but the AGG fell by 0.50%.
Janet Yellen said on May 6 that “Equity market values at this point generally are quite high…there are potential dangers there.” That comment coincided with the low, at least so far, for the month of May.
According to Bespoke, the Q1 earnings season recorded 60% of companies with an earnings beat and 50% with a revenue beat. The earnings beat was in line with historical numbers but the revenue beat was low. Earnings guidance was -2.9%, about in line with past estimates.
What has gotten the market more concerned is the change in interest rates. The 2/10 spread started the year at 1.50 and is currently 1.57, but the 10/30 spread has opened up from 0.58 to 0.78. The 2/30 spread started the year at 2.08 and is now 2.35, so the curve has steepened on the long end, thus contributing to the year-to-date fall in the AGG.
Ultimately, a price of an asset is a function of future cash flows divided by a discount rate. If rates are headed higher, all other things equal, prices of assets will come down. The market might have already priced in some future increases, but the risk would be that rates increase faster and higher than anticipated. The Fed seems very hesitant to rush any kind of increase.
Higher interest rates have helped floating rate funds. A good gauge in sentiment is the changing discount/premium in closed-end funds. The Apollo Senior Floating Rate (AFT), a fund that we have held in some accounts for a while, now sells at 1.08% discount but started the year at a 9.27% discount to NAV. Meanwhile, closed-end funds that own municipals continue to sell at steep discounts. The MFS Municipal Income (MFM), also a fund that we own in some accounts, is selling at an 11.52% discount from NAV. It started the year at a 9.91% discount. The current distribution rate is 6.14%, let’s assume an investor has a 28% marginal tax rate, that would be a tax-equivalent yield of 8.53%.
We are thinking about gold. Last week in Barron’s Laurence Fink, head of BlackRock said that “gold has lost its luster” as a historic store of wealth. That seems to be the consensus about the metal. Add in the fact that the VIX hit a 2015 low on Friday and maybe that is a signal.