While large cap energy names have also struggled, small cap energy names as a group are down nearly 20% since mid-December, over 10% worse than large cap Energy. (It can be noted the small cap energy sector is technically in a bear market, as it has drawn down over 20% since its peak on 1/4/2017).

Taking a slightly longer-term view, small caps significantly outperformed large caps during the Trump Bump and still have a performance edge on large caps since the election.  Therefore, this more recent underperformance could just be a bit of market consolidation as we wait for more news to come out of Washington regarding regulations and spending.

Switching gears slightly to look at how rates have performed over the same period, it is a bit of a tale of two halves (of the curve).

chart-c

The curve has flattened significantly, as the very shortest end (T-bills) has spiked nearly 20bp on the Federal Reserve raising rates (most of this spike came at the end of February/beginning of March). Conversely, longer dated treasuries have traded nearly 15bp lower since December 14, which coincided with the post-election rate top.

chart-d

So while rates are lower, they definitely still appear to be rangebound, with the 10-year trading in an approximately 30bp range from 2.3% to 2.6% (of which it is almost in the middle of currently).  So interest rates generally seem to be following in the similar complacency trade as equities.

Taking a quick snapshot of other asset class performance since 12/14/16 leaves a bit of a mixed signal as well:

  • Gold: +6.83%
  • US Dollar: -2.07%
  • EAFE (Local): +5.31%
  • Emerging Markets (Local): +8.59%

So while international markets have performed admirably (even without the currency effect), which could be a pro-speculation trade, Gold has also ripped higher, which could be a pro-flight to quality trade.  Throw in declining and/or continued low levels of volatility in equities, rates, and gold, (and the increasing volatility coming out of Washington!) and it can be a bit of a complicated task predicting what markets will do from here.  Therefore, while the complacency trade may be over, we will just have to wait and see on what comes next.

Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.

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