4 Market Surprises So Far This Year

Sometimes the market does its own thing, regardless of what we thought would happen.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Sometimes the market behaves just as expected, and sometimes it seems to go completely off script.

So far this year, there have been four surprising—at least, to some—twists that seem at odds with conventional wisdom among investors.

Yields Declining, Not Rising

The Federal Reserve began raising rates in December, but Treasury rates have actually been declining since. Year-to-date, 10-year Treasury yields have slipped some 18%, dropping to 1.86% this week—its lowest levels in nearly a year.

What’s also interesting is that the downward pressure on yields has been felt across the curve—even in the shorter end, where Fed action is a key driver.

The flip side of that is strong investor demand for safe bonds such as government high-grade debt. For example, the iShares 20+ Year Treasury Fund (TLT | A-83) has gathered nearly $2 billion in fresh net inflows in 2016, while the iShares Short Treasury Bond (SHV | A-97) has attracted $2.7 billion year-to-date. Midterm bond funds are also seeing net creations.

These Treasury funds are all delivering positive returns when the U.S. stock market is not:

At the heart of this trend is growing concern about the health of the U.S. and the global economy given various data points suggesting a slowdown may be taking hold.

Gold A Top-Performing Asset

No one has liked gold for the past few years—even in 2015, as the stock market rally faltered. Gold prices declined more than 10% last year, after ending in the red nearly 3% the year before, and down some 28% in 2013. Gold has had a tough go in the past three years.

But in January of this year alone, the SPDR Gold Trust (GLD | A-100) found itself among the most popular ETFs, raking in nearly $1 billion in net creations in four weeks. As of today, inflows into the trust have reached $1.75 billion year-to-date. Other physical gold ETFs, such as the iShares Gold Trust (IAU | A-100) and the Van Eck Merk Gold Trust (OUNZ | B), have also seen net inflows.

The fresh assets have come as gold prices have risen, outperforming just about every asset year-to-date. GLD is up nearly 9% in 2016. The chart below shows that performance relative to the SPDR S&P 500 ETF (SPY | A-98):

Like the case in Treasury bonds, gold is a safe-haven play this year. Investor confidence in the resilience of the U.S. economy and on the Fed’s ability to push rates higher currently isn’t all that strong. A weakening in the U.S. dollar has also contributed to gold’s strength.

The Dollar Is Weakening

For a few years, one of the prevailing themes in currencies was that of the strength of the U.S. dollar. Its rise against other major currencies—such as the euro, the yen and yuan—was undisputed, and it in fact fueled a craze for currency-hedged international stock funds.

But not this year. So far in 2016, the dollar has been on a downward path, losing momentum as investors flock to safety. Concerns about China’s economic growth outlook, and increased stock market volatility—fueled in part by divergent central bank policies around the globe—have weighed on the greenback.

On the domestic front, expectations that the Fed may not raise rates any further this year has also reduced the interest rate differential between the U.S. and other countries, which is the primary driver of the currency in the short term.

The euro has now risen 3.3% against the dollar year-to-date, while the yen is at its highest level since mid-October. In an ETF wrapper, the dollar decline can be seen in the performance of the PowerShares DB US Dollar Index Bullish (UUP | B-73):

Utilities Are Red-Hot

Every sector of the S&P 500 is in the red this year, except for utilities. Utilities—the only sector to deliver a positive performance in 2016—are up some 7.7% year-to-date.

Echoing the defensive theme seen elsewhere, and seen as a sector that should perform well and deliver solid dividend yields going forward, it’s perhaps unsurprising to see utilities shine when the S&P 500 is down 6%.

Investors are buying into it. The Utilities Select SPDR (XLU | A-88) has seen nearly $1.1 billion in net inflows so far in 2016, and the First Trust Utilities AlphaDex (FXU | B-85) has gathered $322 million.

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.