Covenant Weekly Market Synopsis for November 10, 2017

November 12, 2017

Domestic equity indices closed the week lower, but the damage was minimal with declines of less than 0.5%. Developed international markets followed their U.S. cousins, while emerging markets posted gains of 0.7% (pushing year-to-date performance above 34%). Interest rates moved modestly higher across the curve, with the yield on the 10-year UST closing the week at 2.4% (at the top end of the 2.1% – 2.4% range it’s inhabited for the last seven months). At the beginning of the week Saudi Arabia’s Prince Salman ordered the arrests of more than 200 people to purge corrupt factions within the country (or to consolidate his power, or both). Prince Salman’s actions caught the market by surprise, helping push the price of oil higher. WTI Crude jumped 2% to $56.74 per barrel, the highest price level since early January.

For more detail on weekly, month-to-date and year-to-date asset class performance please click here.

Calm Seas – For the first time in 9 weeks, the S&P 500 posted a decline. But it was of trivial magnitude, falling only 0.1% (inclusive of dividends). Underscoring the low volatility that has characterized this phase of the bull market, Friday marked a big day for market geeks as it was reportedly the first 12-month period in the history of the S&P 500 without a 3% drawdown. And they aren’t talking about a daily decline of 3%…they mean a market peak to market trough of -3% (which could occur over the course of several days or weeks). By this measure, in 95 years of data, there has never been a calmer time in the market than we have just experienced. 

This Time is Different? The Bank of England recently published research on its “Underground Blog” highlighting trends in more than 700 years of interest rates. An impressive historical data set built from the risk-free rate of the dominant asset in each period since 1311. In case you are wondering, the data begins with interest rates in Italian city states and then moves from Spain, to the Province of Holland, the U.K., Germany and the U.S. as the balance of global power shifted through history.


While the 700-year average is 4.78%, the more recent 200-year average is closer to 2.6%. Even measured against the lower 200-year average level, today’s real rates are “severely depressed” according to the author of the research, Harvard University’s Paul Schmelzing. Indeed, the current downward trend is one of the longest in the data set, second only to the “Long Depression” that begin in the 1880s. Anecdotally, the “Long Depression” was characterized by low productivity growth, deflationary price dynamics and rising global populism/protectionism. Sound familiar?

Over this 700-year data set, there have been nine interest rate “depressions” – prolonged periods of declining interest rates. The cautionary tale from the data is that reversals from the depressions tend to be relatively swift. Historically, within two years after reaching their lows, interest rates gained on average 3.15%. And there were two occasions when rates jumped by more than 6% in 24 months. The moral of the 700-year story is that unless this time is different, history is signaling higher rates in the near future. A countervailing force to higher rates, and why this time may truly be different, is that never in history has there been such a massive overhang of global debt.

Be well,