Investors welcomed stocks into 2014 with a wave of profit taking. Many were itching to lock in profits before the end of the year, but by waiting for the calendar to roll over, they were able to delay paying taxes another year. Stocks have now regained their footing, and other factors will determine their fate in the weeks and months ahead.
Abnormally cold weather is gripping the nation. The polar vortex responsible for the frigid temperatures has not produced a noticeable impact on stock and bond prices, and the usual weather-sensitive commodities don’t seem to be reacting strongly either. An exchange traded fund (“ETF”) tracking diesel and heating oil futures has declined more than 4% since late December. ETFs tracking natural gas have shown similar declines. There isn’t an ETF for orange juice futures, but if there were, it would be showing a rather non-dramatic 2% gain in 2014.
Economists have mixed opinions regarding the weather’s impact on employment reports. The December report, due out this Friday, will be based on survey data acquired before the storm’s arrival. However, the January report that arrives in early February could be affected if the arctic cold doesn’t loosen its grip soon. Even though this week’s report should be free of weather anomalies, it will be closely analyzed because it should also be free of the partial government shutdown glitch that was present in the last two reports.
On the subject of the partial government shutdown in October, concerns about its impact on the economy have been mostly put to rest. Earnings season is just around the corner, and analysts are projecting fourth quarter earnings for the S&P 500 companies to show a nice 7.6% year-over-year gain. If those projections are met, it will be the best quarter since the first half of 2012.
The Fed is pumping “only” $75 billion into the economy this month, instead of the $85 billion monthly rate of the past. On Monday, the U.S. Senate approved Janet Yellen as the new Fed chair, and she is slated to be sworn in on February 1. Technically, Ben Bernanke will still lead the Fed’s FOMC meeting scheduled for January 24 and 25. However, our bet is that a spirit of cooperation will prevail. Whether or not additional tapering is announced is yet to be seen.
Some steam came out of the market as the calendar rolled over with most sectors losing momentum in this first week of trading. The Industrials sector still claims the top spot, but second place Technology is now posing a serious challenge. Consumer Discretionary and Materials swapped places with Consumer Discretionary coming out ahead this time. Fifth place Health Care has closed the gap on Materials and appears destined to rise in the rankings by our next update. Financials remains strong, and the category is close on the tail of Health Care. This proximity gives Financials the opportunity to now associate itself with the upper tier. Absolute strength begins to fade below Financials, and the bottom five groups are in the same relative order as last week. Utilities lost the last of its positive momentum and is sitting in the red this week. Real Estate is the lone sector category to gain momentum this week, although the increase wasn’t enough to get it out of the basement.
Micro Cap still has a decisive edge over the other style categories, and Small Cap Growth remains solidly in second place. The next six or seven positions have become nearly indistinguishable as their momentum scores are highly compressed. Only two points separate third place from eighth place, and two points can often be attributable to noise and rounding. The Morningstar style box is built on a nine-square matrix, with the rows designating capitalization sizes (largest on top), and the columns identifying Value, Blend, and Growth (from left to right). For our purposes, we also include Mega Cap across the top and Micro Cap across the bottom without segmenting them into columns. Given this style box configuration and today’s rankings, the area of highest relative strength is located near the lower right hand corner and the weakest relative strength is toward the upper left hand corner.
Europe took the top spot away from the U.S. last week, and today the U.S. is attempting to reclaim its former place. The U.K. is still chasing the U.S. and closing in, so what we now have is a near three-way tie for first place. The dollar has gained against both the euro and the pound this week, making the performance of Europe and the U.K. even more impressive. Strength begins to fall off for the next four categories as World Equity, EAFE, Japan, and Canada occupy the same relative positions as last week. Pacific ex-Japan climbed two places to eighth but remains in a negative trend. The three developing market categories are all at the bottom this week. China and Emerging Markets both flipped from positive to negative trends, while Latin America keeps its last place ranking.
“Nobody is getting out of this one right now.”
Bruce Terry, National Weather Service Meteorologist on the big chill of 2014
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