Note November 7, 2017: Minding the gap of expectations and credibility has been a market issue that has flared multiple times, not least when investors are lulled about risk. Operational changes need to be monitored at several central banks, including at the Federal Reserve despite the aura of continuity in new leadership from February 2018. Absent currently active vigilantism, the derivative impact of government budgets and deficits has been under addressed in the pricing of fixed income. It makes any credibility gap in a momentum market all the more significant especially if reports are accurate of the widespread use of leveraged fixed income holdings in order to boost yield. Fee slicing in ETFs could have the side effect of extenuating lurches in capital markets.
Even with a paucity of index corrections in the equity markets, rotation has been instructive amid predispositions already of reacting after the fact especially on adverse operational performance. In classical late cycle fashion, on more confidence about global growth with the antecedent of that in the U.S., small capitalization equities and global equity indices did pick up relative performance. Now, even as the S&P 500 and DJIA indices set records into November 6, 2017, subsequent relative slippage such as in U.S. small capitalization indices has appeared. Even more so, expanded volatility and similar relative performance slippage could presage change. An ancillary effect of the current price war in ETF fees may have made equities even more susceptible to herd behavior.
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