The U.S. economy and financial markets received some much needed relief during the past week. The S&P 500 was up 1.5% on the week, and volatility, as measured by the CBOE VIX, closed below 20. Ten-year treasury bond yields rose, ending the week at 1.76%. Second-estimate GDP data for the fourth quarter of 2015 was revised up from 0.7% to 1.0%, largely due to higher levels of inventories. West Texas Intermediate (WTI) crude oil prices increased roughly 10% during the week. Personal consumption expenditures as a share of GDP increased dramatically, as shown below (through my measure below includes some extrapolation in the denominator).
Much of what has been driving concerns of investors is uncertainty. One fantastic measure of economic policy uncertainty, prepared by Scott Baker, Nick Bloom, and Steven Davis, looks at three factors: specific newspaper keywords, tax provisions set to expire, and disagreement among economic forecasters. Their website contains up-to-date indices for several countries, as well as more information on their methodology. I’ve added their monthly U.S. economic policy uncertainty index to the dashboard.
One interesting development in foreign exchange markets was the depreciation of Pound Sterling against the dollar following an announcement by Boris Johnson that he would be campaigning for the U.K. to leave the European Union (at least to get “a better deal”). The pound fell by more than 2.5% against the dollar during the past week. The Canadian dollar strengthened more than a percentage point against the U.S. dollar.
Lastly, today was the release of the annual letter to Berkshire Hathaway’s shareholders, a consistently excellent read. Mr. Buffett did weigh in on the U.S. presidential race, but I found his insight into inequality to be a particularly accurate summary:
Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.