One of the biggest surprises this year may be how staid the markets remained regardless of news, global events, and economic data. In January, we saw the first presidential change in eight years. Many feared that the tweeting and rhetoric common during the campaign may have an impact on financial asset prices. Instead, even with a senior administration official resigning, news of an FBI investigation, and the failure of signature legislation, markets barely moved. The VIX (a measure of equity volatility) recorded its lowest average quarter since Q4 2006.
Following the decision to raise rates in December and continue on a gradual path of rate hikes in 2017, the FOMC adeptly maneuvered from a possible May or June hike to raising rates in March. It raised the possibility of two or more rate hikes, with no dramatic movement in asset values. While shorter rates rose, the 2-year Treasury yield is only 7 basis points higher than the start of the year. The 10-year fell 5 basis points and traded in a tight band around its average yield of 2.45%.
With international growth stable to improving in major economic regions and the European Central Bank reducing its quantitative easing program (likely expiring at year-end), the strength of the U.S. dollar is dampened. Even as expectations rose in the U.S. for future rate increases, U.S. dollar appreciation was not only curtailed on a trade weighted basis, but actually declined 3%.