Summary and Conclusion:
Asset prices rose during November. The S&P500 index of U.S. equity market prices increased by 1.5 percent. The VIX rose by nearly 20 percent during November from its lowest levels of the year in September and October but still remains well below its levels preceding the election and during the beginning of the year. The yield on 10 year U.S. government bonds edged up to 2.37 percent, returning to the level preceding the election. Federal Reserve officials intimated that a rate hike in December is a strong possibility. (The latest release on core and headline inflation based on the PCE price index registered 1.6% (headline) in October relative to October of 2016 and 1.4% on core. (The Fed’s target is 2.0%.) The dollar depreciated 0.75 percent against the major currencies -- a level 8.0 percent weaker than its January 2 reading. I attribute the weaker dollar to a combination of the Federal Reserve’s normalization of its balance sheet (- $10 billion) being partially offset by an accumulation of dollar reserves by the main international reserve holders (+$8.2 billion during the month) and slightly stronger than expected growth abroad. The weakness in the dollar during the past year I attribute to the build-up in international reserves during the past year. I believe the mild pick-up of volatility is due to the completion of draft legislation on tax reform by both houses of Congress that excludes a capital gains tax cut. The modest positive direction of the markets since the Presidential election and the continued low level of volatility stems from market participants waiting for the resolution of Health Care legislation promised by House leadership next year that might well contain a removal of the ACA investment income tax.