• U.S. stocks touched another record high once again this week as the S&P 500 Index is in the midst of its best January return since 1997.21,22 Investors remain enthusiastic about the potential benefits of the recently signed tax bill along with the strong start to the current earnings season.
  • As noted last week, the Dow Jones Industrial Average recently completed its fastest ever thousand-point climb when it moved from 25,000 to 26,000 in just 8 days.23 Following such a rapid move, many market valuation metrics sit at, or near, all-time highs.
  • One such metric, the Shiller Cyclically Adjusted PE ratio, or CAPE, is currently at 33.6. It has only been higher once in its history, when it reached approximately 44.2 in 2000.24 It’s important to note that the market’s rising valuations have come at a time when volatility has been near a historic low point. The CBOE Volatility Index, at 11.52, currently sits at just over half its long-term average of approximately 19.3.25
  • No one can predict when or where the market will move next. However, investors might be wise to watch market conditions should volatility once again enter the markets from such potential sources as Fed policy, consumer demand and employment trends.
  • The chart highlights the performance across major equity asset classes during two recent downturns – the tech bubble that began in 2000 and the global financial crisis beginning in 2007. As shown, global diversification did not provide adequate protection to investors in either period.26 In both instances, performance across traditional asset classes remained highly correlated, generating significant declines across domestic, international and emerging market equities.26

1 ICE BofAML U.S. High Yield Master II Index.
2 FXStreet, http://bit.ly/2DEbpht.
3 Reuters, http://reut.rs/2GkhXE3.
4 Federal Reserve Bank of St. Louis, 2-year Treasury yield, http://bit.ly/2anGvQ0.
5 Thomson Reuters Lipper.
6 ICE BofAML U.S. High Yield CCC and Lower Rated Index.
7 ICE BofAML U.S. High Yield B Rated Index.
8 ICE BofAML U.S. High Yield BB Rated Index.
9 Credit Suisse Leveraged Loan Index.
10 Federal Reserve Bank of St. Louis, 10-year Treasury yield, http://bit.ly/29ecBfp.
11 ICE BofAML U.S. Corporate Master Index.
12 ICE BofAML U.S. 2-year Treasury Index.
13 ICE BofAML U.S. 10-year Treasury Index.
14 Federal Reserve Bank of St. Louis, U.S. dollar, http://bit.ly/2BuMvPG.
15 CNBC, http://cnb.cx/2BuM4oz.
16 OilPrice.com, http://bit.ly/2DFW4Bd.
17 Bloomberg, https://bloom.bg/2DEJhLl.
18 Bloomberg, based on CME data.
19 Federal Reserve Bank of St. Louis, 10 yr-2 yr, http://bit.ly/2oMWaP2.
20 Bureau of Economic Analysis, http://bit.ly/1DqcVBJ.
21 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
22 Bloomberg, as of January 25, 2018.
23 The Wall Street Journal, http://on.wsj.com/2Dm2qFI.
24 Online Data Robert Shiller, http://bit.ly/1qlZ47U.
25 CBOE Volatility Index, based on data between March 1990 through January 25, 2018.
26 Bloomberg, as of January 25, 2018. Domestic stocks represented by the S&P 500 Index. Global stocks represented by the MSCI World ex USA Index. Emerging market stocks represented by the MSCI Emerging Markets Index.

The Alternative Thinking Week in Review market commentary and any accompanying data (“Market Commentary”) is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The Market Commentary is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such Market Commentary. The Market Commentary should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the Market Commentary or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.