An unmistakable pattern of closed-end fund performance over the last few months has been the steady grind of higher prices and lower discounts. The question is whether this behavior is reflective of broader dynamics in the market. We think the answer is yes and it has to do with the unusual pattern of higher bond and equity prices.
In the chart below we plot the percentage of weekly returns when both bonds and equities finished higher. It is easy to see that 2017 is indeed an unusual period. We think that bond yields overshot to the upside on the Reflation Trade and expectations of inflation, wage and economic growth have come back down to earth along with interest rates. Stocks on the other hand have paid more attention to the expectations of regulatory and policy changes such as the corporate tax plans and softer tones on NAFTA. So while we don’t expect this Goldilocks environment to continue we also don’t expect the ‘nightmare scenario’ of lower bond and equity prices.