Summary

US financial markets are not feeling much stress according to Federal Reserve measures, nonetheless there are important rotations underway within and between asset categories.

Overall financial stress is low, and around levels not seen since early 2007.

Stocks investors are rotating out of momentum and high valuation stocks, into low volatility (up 2x the S&P return YTD), high dividend stocks (up 3x the S&P return YTD); and out of small-cap stocks (down over 4% YTD) to favor large-cap stocks; and to some degree they are rotating into emerging market stocks (up 2x the S&P return YTD).

Within the S&P 500, from highest to lowest, utilities, healthcare, energy, staples, basic materials and telecommunications are outperforming year-to-date. Cyclicals are the worst performers year-to-date (down over 3% YTD). While drops in technology momentum stocks have been in the news, the overall large-cap tech stocks are positive for the year and only slightly underperforming.

Treasury yields, except at the very short end, are falling instead of rising as the consensus had expected. Below investment grade bonds are rising somewhat, while investment grade bond prices are relatively flat.

Long-term Treasury and investment grade bonds are significantly outperforming the US aggregate bond index (up 3+x the aggregate bond return YTD.

High yield corporate bonds are in-line with the aggregate, but high yield municipal bonds are doing very well (up almost 4x the aggregate index YTD).

QVM Client Letter (Vol. 7 No. 8): Market Conditions Review