Below is an excerpt from our weekly Bespoke Report, just sent to subscribers.
- Both sides of the Atlantic were abuzz this week with political headlines: a former FBI director took the stand in Washington to call the President a liar, while a shocking election result in the UK sent the pound sterling tumbling and threw the entire country into political flux while the ticking clock of Article 50 is running.
- For all that political heat, XIV (the inverse short-term VIX futures ETF) has outperformed SPY by almost 50% YTD (chart, right).
- The VIX has been below 16 for 145 straight closes through Thursday, the third-longest such streak on record, and hit its lowest levels since 2006 on Friday.
- An equal-weighted portfolio that should perform well in a “good policy” environment (short ten year notes, long the dollar, and long equities) has moved sideways almost all year long.
- In other words, despite a raucous period for society, the markets are tame and docile.
- That’s a scenario we’ve been mulling for quite some time; the reaction from global equity markets following Brexit was an early sign of that regime, as was the equity market’s significant rally in 2016 following the US election.
- Back in March, we highlighted the steady grind higher in the stock market during the tumultuous year of 1964, when Goldwater ran for President, the Civil Rights Act became law, Vietnam was heating up, and LBJ introduced his ’Great Society’ initiatives.
- In the background of the light from political disruption is the economy: after the entire world got onto the same page of upside surprises in Q1, American data has deteriorated.
- Investors are forced to ask: is the political light distracting from weak data here in the USA?
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Have a great weekend!