An 11th hour deal to avoid the Fiscal Cliff propelled markets higher on the first trading day of 2013. Calling it a “deal” could be considered generous phrasing because the last minute actions of our elected officials appear to be just another round of “kick the can”. With both sides of the political aisle struggling for better field position, perhaps “punt” is the appropriate terminology. What we really got was a new deadline of February 28.
The package approved by the Senate and the House provides for increased revenues in the form of higher marginal tax rates for individuals making more than $400,000 and couples above $450,000. The highest rates on dividends and capital gains will go from 15% to 23.8% including the 3.8% Obamacare tax. A 2% increase in the Social Security payroll tax rate from 4.2% to 6.2% will affect nearly everyone receiving a paycheck. Your taxes just went up.
Passage of the compromise was not a given because it contained very little in the way of spending cuts. Sequestration has been pushed out two months. Coincidently, the debt ceiling is expected to be reached about the same time. Many political analysts are of the opinion that Republicans hold a stronger hand when it comes to the debt ceiling, at which time they will get their spending cuts. However, President Obama has taken the position that he will “not negotiate the debt ceiling,” whatever that means. So, the groundwork has been laid for more political wrangling in the near future. This isn’t over yet.
Every major sector posted large gains today and nearly every asset class participated in the rally. The primary exceptions were U.S. Treasury securities and the U.S. dollar. Volume was high and participation was broad. Analysts will be watching market action closely in the coming days for clues as to whether this is the start of a large sustainable move or just a short-term relief rally.
Financials and Materials begin 2013 with identical momentum scores that place them at the top of the sector rankings. Both moved up one position as the former leader, Industrials, slipped to third place. We view the ranking drop of Industrials as a non-event instead of a sign of weakness at this time. Consumer Discretionary held on to its fourth place position. Telecommunications and Health Care swapped places. The last four sectors slipped from positive to negative trends this week, although the scores from both weeks could be interpreted as neutral. Energy maintained its seventh place ranking, while Technology climbed two steps out of its former last place position. The “defensive sectors” are taking the backseat in this market with Consumer Staples and Utilities on the bottom and Health Care slipping into the lower half.
The Style rankings are favoring a “risk on” posture with Small and Micro Cap stocks taking the lead. Small Cap Value occupies the top spot for the second week in a row as Small Cap Blend moves up a notch to grab second. Micro Cap jumped three spots to claim third place. Mid Cap Value and Mid Cap Blend were pushed down to fourth and fifth as strength shifted to small cap stocks. Small Cap Growth and Mid Cap Growth come in at sixth and seventh this week, indicating the market’s continued preference for Value over Growth. The Large Cap categories are lagging, with all three bunched near the bottom. Mega Cap is the only category ranked lower than the Large Caps and is the only Style designation with a negative trend score.
The seemingly weekly rotation for the Global leadership position goes to China this week. Chinese stocks surged the past week on strong manufacturing reports and are up strongly again today. Europe, the region on the other side of the leadership teeter-totter from China, is a strong #2 this week. Emerging Markets jumped from sixth to third on strong gains in China, Southeast Asia, and Latin America. Japan continues to post excellent results, although it slipped a notch to fourth place this week. EAFE and Pacific ex-Japan both moved down one position to make room for Emerging Markets. Latin America continues its climb out of the basement and this week finds itself tied for seventh place with World Equity. The U.K. slid down to ninth place, breaking up the Western Hemisphere’s former control of the bottom three spots. The U.S. is in last place again with Canada just barely above it.
“Underneath the fiscal drama is an improving economy. The fiscal drag will take some wind out of it but once there is more clarity, we can expect stronger growth.”
Jared Ryan Sweet, senior economist at Moody’s Analytics
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