Will Volatility Increase This Week?

June 15, 2015

Will Volatility Increase This Week? Photo

Last week was relatively slow, from a market perspective, until later in the week. Watching the market at the beginning of the week reminded me of the very slow day that I had serving jury duty last Wednesday -- a lot of sitting and waiting for some action. Volatility pickled up on Thursday and Friday, but the overall stock and bond markets experienced little overall change during the week. The economic data released last week was in line with consensus estimates. The May retail sales number did indicate, as the market had expected, that spending improved in May from a lackluster April.

I continue to expect the economy to be strong enough for the Fed to raise interest rates in September, led by improving employment and wages. The strong bounce back in the University of Michigan Consumer Sentiment data on Friday, from 90.7 in May to 94.6 in June, reinforced that view.

There has been much talk over the past few weeks of the potential for a repeat of the "taper tantrum" that we saw in May/June of 2013. I don't expect the bond market to sell off the way it did in 2013, due to the current high valuation of the equity market. Valuation concerns should keep any bond market selloff orderly at this point. A bigger risk for the bond market could develop if the Fed is seen as getting behind the curve on inflation. This risk will take some time to play out, given the low level of inflation currently. I expect a choppy bond market over the summer and will be looking closely to see if this selloff could accelerate later in the year. I view fair value to be around 3% on the 10-year Treasury bond currently.

This week will be focused on the Greek stalemate and European markets, which seem to be leading the direction of the U.S. market. In particular, watch the German DAX and Bunds for direction in U.S. stocks and bonds this week.

Tags: Monday Morning O'Malley | Bonds | Stocks | Inflation | Volatility | German DAX | Valuation | Taper tantrum

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