S&P 500 Snapshot: Little Changed By Yellen's Testimony

Today had the potential of major market volatility with the release of June Retail Sales and Fed Chair Janet Yellen's semiannual congressional testimony. The reality was moderate volatility with the Dow up fractionally and the benchmark S&P 500 closing with a small loss, down 0.19%. Retail Sales came in well below economists' forecast, but the April and May numbers months were revised upward -- the latter quite substantially.

Yellen's testimony was accompanied by the release of the Fed's latest Monetary Policy Report. The testimony itself consisted, of standard responses to the usual canned questions. The subtle stroke of brilliance in the report (and touched on in her testimony) was the mention of current equity and bond valuation risk:

"...signs of risk-taking have increased in some asset classes. Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched, with ratios of prices to forward earnings remaining high relative to historical norms. Beyond equities, risk spreads for corporate bonds have narrowed and yields have reached all-time lows. Issuance of speculative-grade corporate bonds and leveraged loans has been very robust, and underwriting standards have loosened."

Why characterize this as "brilliance"? The Fed is now on record has having acknowledged increased market risk, which it can point to in the future and thus defend itself against the charge of "clueless" in advance of a possible financial crisis. For a bit of historical context on the underlying issue, see the Business Insider discussion of this week's New Yorker profile of Ms. Yellen (subscription required to read the relevant excerpts).

The yield on the 10-year note ended the day at 2.56%, 1 bp above the previous close. It is now 12 bps above its interim closing low of May 28th.

Here is a chart of the last five sessions. The index is up 6.76% year-to-date and 0.61% below its record close on July 3rd.