A Friday Rebound After a Tough Start to the Week
Stocks and bonds rebounded on Friday after struggling for much of the week. All told, the Dow Jones Industrial Average rose 0.93% to close the week at 18,191, the S&P 500 Index inched up 0.38% to 2,116, and the Nasdaq Composite Index ended essentially flat, slipping 0.03% to 5,003. As for bonds, the yield on the 10-year Treasury rose from 2.11% to 2.15%, as its price correspondingly fell.
The week demonstrates how both equities and bonds have been mired in a meaningful rise in volatility, a shift partly driven by the recent tick higher in bond yields. We don’t expect more than a modest increase in rates, but even that may be enough to push volatility higher, which is likely to be a headwind for many of the most popular so-called momentum stocks.
Watching Data and the Fed
With first quarter earnings season winding down, investors are once again turning their attention back to macroeconomic data and the Federal Reserve (Fed). The U.S. data continue to be mixed, with the exception of a better-than-expected ISM Services survey. A poor trade report suggests that the first quarter’s growth in gross domestic product (GDP) may ultimately be revised down from a nominal gain to a slight contraction.
On the jobs front, the U.S. unemployment rate dropped to a post-crisis low of 5.4% and job growth rebounded in April. However, the rest of the report was less than stellar. The U.S. created 223,000 new jobs in April, in line with expectations, but March’s reading was revised lower by roughly 40,000 and hourly earnings were up a scant 0.1%, less than expected.
Friday’s data helped provide at least a temporary reprieve for bond investors. Bond prices rallied and yields pulled back as expectations for a Fed interest rate hike once again shifted, with investors less concerned the Fed would move too much or too soon. However, as we still believe the Fed is likely to hike later this year, bonds will probably remain under some pressure. This has implications beyond the fixed income market.
Namely, the rise in rates in recent weeks has coincided with a rise in volatility for both stocks and bonds. The VIX Index—a measure of implied volatility in U.S. large-cap stocks—rose to more than 16 last week, a one-month high. While this is still below the long-term average, volatility has jumped by roughly 35% since early May. Meanwhile, the MOVE Index—a measure of bond market volatility—jumped from 70 to 90, a nearly 30% move in less than two weeks