The Mad March Bounce

By Eric Kuby via

The global bounce-back equity rally resumed, as the S&P 500 posted its best week since November by gaining 2.89%.

The narrative remained the same with accommodative monetary policy, subdued inflation, reduced trade tensions, and aggressive stimulus programs in China. The economic data was tepid as durable goods, new home sales, industrial production, and the Empire Manufacturing Index all came in slightly below expectations. January retail sales exceeded expectations, but December was revised down further (I still find the December data hard to believe). Prior to last week’s gains, the S&P 500 was exactly at the same level as one-year earlier while the Russell 2000 remains still slightly in the red.

During that time frame large cap growth has outperformed small cap value by 7.64% with 4.51% of that performance disparity coming in the last month.

The yield on the Ten-Year Treasury inched down 2 basis points to 2.59% to settle at its lowest level of 2019. These lower interest rates increase the attractiveness of growth stocks as the future value of their income streams are increased as the discount rate decreases. The flattening of the yield curve (the spread between the 10-year and 2-year Treasuries is only 16 basis points currently) creates a headwind for the financial sector which is disproportionately weighted in value indices (26.84% of Russell 2000 Value Index).

I have stopped referencing the VIX (CBOE Volatility Index) because it only seems to take the current temperature without offering any predictive value. Nevertheless it seems worth pointing out that the VIX dropped 20% last week, and is now back to its level from October prior to the nasty sell-off.

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