Employment Headline Numbers Improve
The U.S. stock market climbed to its highest point since July 2011 in a broad-based rally. Small cap stocks are lagging behind, however, and international markets are still far from making similar breakouts. Volume remains below average as most investors lack the necessary conviction to increase their risk exposure in early 2012.
The January rally comes in response to generally good economic and corporate news. Last Friday’s payroll report revealed an unemployment rate at its lowest point since February 2009. The ADP jobs report likewise showed a jump in private nonfarm payrolls for December. An encouraging sign: most of the improvement came from small and medium-sized companies.
Other news was not so impressive. Chain-store sales rose 3.5% in December, below expectations and thanks in large part to steep discounting. Housing affordability is still near a record high – which is another way of saying that real estate prices are a long way from recovery.
The Fed released its Beige Book today, claiming the economy “expanded at a modest to moderate pace” late in the year on increased holiday retail sales, demand for services, and energy sector activity. The Fed also cautioned that housing remained sluggish and permanent hiring has been limited.
Treasury yields are holding at historic lows as a troubled world continues to pour its cash reserves into the last remaining safe haven. The ten-year yield is still below 2%. Oil remains above $100, with Iranian threats to close the Persian Gulf adding a noticeable risk premium to the energy market.
Top-ranked Industrials, climbing up from third place, broke out to a five-month high and is picking up momentum. The long-suffering Financials sector is seeking its day in the spotlight. After moving up steadily the last few weeks, the sector is now within easy striking distance of first place. Capturing that position, and then holding onto it, is not a sure bet. The category’s most popular ETF, SPDR Financials (XLF), is still below its 200-day moving average and has not broken above its October 2011 peak. Health Care also looks good, checking in at #3 today. In other action, Energy and Materials moved up the ranks while Utilities and Consumer Staples retreated. Utilities fell hard, dropping from first place all the way to eighth in the span of a week. The short-term market rally may be causing investors to rotate out of defensive groups. Telecom is still in last place and is the only sector with negative momentum.
The trend toward Value categories we mentioned last week is still in place, with Growth falling behind at all capitalization levels. Relative rankings stayed mostly the same, but all segments improved their scores thanks to positive market action. Mega Cap is still the leader, but Large Value is hot on its heels with Small Value not far behind. For the first time in months, every Style category has a double-digit positive RSM score.
The U.S. and the U.K. held on to first and second place, respectively, while the rest of the world is trying to catch them. China moved up to the #3 position and now shows bullish intermediate-term momentum. So do Latin America, Canada, and World Equity. The improvement in China comes on the heels of disappointing economic reports. Those same reports drove equities higher as traders speculated new stimulus policies will be forthcoming. Europe is back in its familiar last-place position.
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.
“Unfortunately, it will take far greater monthly growth than the 200,000 jobs created in December — and higher quality jobs — to spur significant consumer spending and a self-reinforcing recovery.”
New York Times editorial (1/6/12)
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