Still, economic resilience at home does not mean U.S. assets are immune to the global slowdown. The S&P 500 Index traded down to a five-week low and volatility –– as measured by the VIX Index –– rose above the 20 threshold for the first time since October. The VIX was below 12 less than two weeks ago. We’ve also seen a significant sell-off in high yield bonds. This has sent the “spread,” or the difference between the yield for high yield bonds and U.S. Treasuries, to its widest mark since June 2013.
But the biggest losses were once again in the commodity sector, particularly oil. The price of U.S. benchmark WTI crude oil slipped below $60/barrel, the lowest level since July 2009.
Meanwhile, in contrast, safe haven assets rallied. German bund yields fell below 0.70%, 10-year U.S. Treasury yields closed below 2.10% and U.S. tax-exempt bonds experienced a 19th straight week of inflows.
Global Politics Stoke Risk...and Opportunity
The contrasts between the U.S. and the rest of the world are on display on the political stage as well. The year ahead is likely to be one of relative inactivity in U.S. politics. Indeed, the U.S. Congress just barely managed to squeeze a funding bill through and avert another government shutdown. However, before the calendar even turns the page, we're already seeing global politics re-emerge as a key investment driver. The past week featured two examples: one that we would characterize as a risk and one a potential opportunity.
The risk comes from Europe. Last Monday, Greek Prime Minister Antonis Samaras surprised everyone by moving up the date for a Greek parliamentary vote for a new president. (The first vote will take place on Dec. 17, but the final round does not occur until late in the month.) It is not clear the government can reach the necessary majority to maintain power.
Anxiety over the election and the potential for a new government in Greece less committed to reform is already being felt in asset prices. Not only did Greek assets sink on the news last week, but broader European equities suffered one of their worst weeks in months, reflecting investor concerns that the ramifications would be felt throughout the eurozone.
While European politics represent a risk, Japan's may offer an opportunity. Preliminary results from Sunday's election suggest that the ruling LDP party maintained, and potentially increased its super-majority in Japan's lower house (The Diet). The strong showing by the LDP party will — in theory — give Prime Minister Shinzo Abe the political clout to push through more pro-growth policies, including trimming the corporate tax to 20%, enacting labor market reform, and deregulating the energy and farming sectors. All of these, in our assessment, would further strengthen the case for Japanese stocks.