01/04/12   2011: Flat Year, Wild Ride

Editor’s Corner

Investor Heat Map: 1/4/122011: Flat Year, Wild Ride

Ron Rowland

The year ended with the S&P 500 almost exactly where it began, but we doubt many investors have forgotten the wild ride in between.  Defensive sectors were the 2011 winners.  Utilities, Consumer Staples, and Health Care filled their traditional role as the place to be in troubled times if one must stay in stocks.  Treasury bonds were an even better refuge, despite the historic S&P downgrade of the U.S. credit rating in August. 

With the 2011 books now closed, what about 2012?  We haven’t seen as many annual forecasts this year.  This is just as well, since the predictions rarely prove very useful.  Their main value is to provide entertainment. 

The Federal Reserve’s next policy meeting on January 24-25 will bring a new bit of information.  For the first time, the Fed plans to reveal its own forecasts for the Federal Funds rate.  The idea is to give markets additional assurance that borrowing costs will stay low, thus enticing growth investments.  On the other hand, releasing this information may simply confirm that the Fed’s staff economists are as clueless as private analysts.  We will see how it works out.

The recent sell-off in gold appears to be subsiding, though bullion has a long way to go before we see another new high.  Crude oil is also on the rise as Iran makes noise about confronting the U.S. Navy in the Persian Gulf. 

Friday will bring the December employment report, which may show a little improvement.  Will it be enough to matter?  Not in the big picture, and with primary elections now underway these numbers will take on a new significance.  Jobless voters are usually not happy voters.


Utilities, the best-performing domestic sector in 2011, still heads our list this week.  Health Care is not far behind, though, and could take leadership soon.  The various Health Care segments are all rising together with very low volatility.  Industrials moved ahead of Consumer Staples to take third place.  Financials stayed in the middle of the pack at #5.  Energy improved a bit, Consumer Discretionary slipped, and Materials and Telecom still own the bottom.


After weeks of jumbled results, a new pattern is emerging in the Style chart.  The market now favors Value over Growth.  All three Value categories are in the upper half of the rankings while Growth holds three of the bottom four positions.  Furthermore, relative strength is tilting toward capitalization extremes while Mid-Cap stays weak.  As a result, the leaders are now Mega Cap, Large Cap Value, and Small Cap Value.  The laggards are Mid Cap Growth and Large Cap Growth.  The range is still relatively tight, but these emerging trends are worth watching.


The U.S. stayed on top of the world with the U.K. closing in.  The two Uniteds also happen to be the only global categories with positive momentum.  We have a nearly five-way tie for third place. World Equity is being challenged by Canada, China, Latin America, and EAFE.  Of note, Canada climbed significantly the last two weeks after lagging for months.  Rising crude oil prices and a strong Canadian Dollar were both helpful.  Japan remains mired in the bottom half, with Emerging Markets close behind.  Europe moved off the bottom to make room for Pacific ex-Japan.  This was due mostly to lackluster stocks in Singapore; a reversal there will likely put Europe on the bottom again soon.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“This [Fed plan to provide interest rate forecasts] is a complete 180-degree shift from the old mysterious-institution approach.”

Ethan Harris, global economist at Bank of America Merrill Lynch


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