Fed: Hold On, We’re Pumping as Fast As We Can
The Federal Open Market Committee wrapped up a two-day policy meeting today with the same policy as before: create money as fast as possible. The Fed noted a little bit of improvement in the economy. However, they want to see some positive movement in the unemployment trends, income growth, and credit availability. These would all be nice, and we the people would like to see the same things.
A couple of miles down the road from Fed HQ, the president last night reported that the State of the Union is strong. He thinks we must, nonetheless, rally to “our generation’s Sputnik moment” before nations like China and India take control of the global economy away from us. Better late than never, we suppose, but nothing so far proposed by anyone in Washington seems likely to improve the situation very much.
Earnings season continues to unfold, with surprises being generally to the upside. Intel (INTC) was among the latest companies to report stronger-than-expected results. A big trend we are noticing is that earnings are being driven by revenue growth as well as cost-cutting. This seems like good news, and it may be, but it may also be an illusion created by the Fed’s stimulation activity. We are not convinced that earnings growth is sustainable at these rates.
The Treasury market has been rather boring the last few weeks, with yields changing little. Bond action right now is much more interesting in the municipal sector, where scared investors are making prices plummet. Gold has declined a bit since the first of the year and is now back where it was in early October, around $1300/ounce. The U.S. Dollar’s latest downtrend, which began 10 days ago, is still intact after today’s Fed announcement.
Energy still sits atop the sector rankings, as it did last week. Unlike last week, Materials is no longer in second place, having fallen all the way to the #6 spot. Broad weakness in everything from copper miners and base metals to chemical and fertilizer makers pushed the Materials benchmark down – but not out. The previous uptrend is still intact. For now, though, Industrials is the new #2 sector, thanks largely to huge gains in General Electric (GE). Utilities and Consumer Staples saw some cash inflows as the broader market pulled back, enough to improve their momentum but not enough to help their relative standings very much. They advanced only because Telecommunications is the new basement dweller.
The Style rankings went topsy-turvy in the last week. We have been in an inverted cap-size pattern for months with Micro Cap and Small Cap leading the way. Now those categories are in the lower half of the table while Large Cap and Mega Cap hold the top. The reason for the change is not hard to discern: small cap stocks took the brunt of a three-day selling flurry last week. Large Caps fell, too, but not nearly as much. Now we will see if the previous pattern comes back; the rankings are so tightly bunched that we could see major relative shifts again next week.
Continuing the run it began in the previous week, Europe is now on top of the global heap. Further strength in the Euro at the same time equity markets are bouncing back from the brink gives Europe more positive momentum than any other region for now. The question remains: is it sustainable? We shall see. Europe’s leap from #8 to #1 pushed all the other categories down a peg, but positive momentum still abounds. Japan remains close behind Europe and the U.S., while the EAFE index moved ahead of Canada to fourth place. Contrary to most of the last year, developed markets are now holding the best relative strength. Emerging Markets, Latin America and China are in the bottom three slots, with China slipping into negative territory.
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.
“The idea of America endures. Our destiny remains our choice. And tonight, more than two centuries later, it is because of our people that our future is hopeful, our journey goes forward, and the state of our union is strong.”
President Obama, State of the Union Address, Jan 25, 2011
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