The Federal Open Market Committee concluded a two-day policy making meeting today. Policy was left unchanged. If there was anything surprising, it was the fact that many analysts were actually expecting something to come out of this meeting. We thought Mr. Bernanke made it very clear last year with his statement that the Fed would remain aggressively accommodative as long as unemployment remained above 6.5%. We are not anywhere near that level, and the Fed kept its promise by taking no action today.
The Fed will continue buying $85 billion of long-term Treasury and mortgage-backed securities each month. Fed officials noted that economic activity “paused in recent months” because of weather (Hurricane Sandy) and temporary factors (year-end fiscal cliff uncertainties). However, they expect economic growth to continue at a “moderate pace” and the job market to see further improvement.
Preliminary GDP figures released today indicate the economy contracted at a 0.1% annual rate in the fourth quarter. Preliminary numbers are usually revised, often dramatically so. It’s too early to know where the final 4Q number will come in. However, if it remains negative, it could potentially be the first of the required two consecutive quarters of negative growth that officially mark the start of a recession.
Earnings season continues to roll along with most results being interpreted positively. About 75% of the companies in the S&P 500 reporting so far have exceeded earnings expectations and 66% have beaten revenue forecasts, according to Bloomberg.
Normally, a weaker than expected GDP report would cause bond prices to rally and yields to drop. However, we live in non-normal times, and bonds did the opposite this morning. Perhaps they were just waiting for the FOMC statement, as bond prices did manage to mount a small rally after the Fed meeting. Still, most bonds finished on the downside today, and the 10-year Treasury yield is sitting above 2.0% for the first time in more than nine months.
Nine of the eleven Sector categories have a new ranking position today. This may seem like a huge shake-up, but in reality, very little has changed. Industrials moved up a notch to grab the leadership position away from Materials. Financials and Consumer Discretionary followed Industrials up the ladder, coming in at #2 and #3. Energy continued its recent climb, moving from sixth to fourth and clearing overhead resistance established during the past year.
Materials, the former leader, fell all the way to fifth. Its momentum remains strong, so the fall is not the result of weakness in the group; it’s more a case of other sectors posting stronger short-term performance. Health Care gained momentum for the week while actually falling one position to sixth as strength in Energy pushed it lower. Real Estate and Consumer Staples are the two categories not changing their relative rankings, remaining at seventh and eighth. There was minor rotation among the three weakest sectors with Utilities and Telecom each moving up a spot and Technology replacing Telecom on the bottom.
There are minor changes in the Style rankings, but the big picture remains unchanged. Value leads Growth at all capitalization levels, and the Small and Mid Caps are favored over Large Caps. Mid Cap Value jumped from fourth place to first and is the new Style leader today. As discussed in our previous update, dramatic changes in the relative rankings can occur when this much compression is present in the rankings. By compression, we mean there is little variation in scores across a group of categories. For example, today’s top eight Style categories are separated by only eight points and a slight change of just a few points could cause positions to shift radically by next week.
The three Small Cap categories were all pushed down one position by Mid Cap Value’s ascent to the top. The middle of the Style rankings are somewhat of a jumbled mess with Mid Cap Blend in fifth, followed by Micro Cap and Large Cap Value. The lower tier is still dominated by the Large Cap categories, although Mid Cap Growth is sliding down to join them. Large Cap Growth and Mega Cap continue to be the laggards.
Europe took the top spot away from China by posting the best one-week performance of any of our categories. China dropped down to second place and actually declined slightly this week. Chinese stocks have been moving mostly sideways since the beginning of the year and are likely to lose more momentum if they don’t join the global equity rally. EAFE climbed a notch to third, swapping places with Pacific ex-Japan. World Equity and Latin America also exchanged places this week with World Equity moving up to fifth.
With stocks making a strong move in the U.S., it’s hard to believe the country is ranked only seventh among the eleven tracked regions. The U.K. pulled itself out of last place and all the way up to eighth. Japan comes in ninth again as its recent rally is struggling to keep pace with other markets. Emerging Markets dropped three places to tenth. Canada fell to the bottom. Moody’s downgraded six of Canada’s largest financial firms, citing ongoing concerns about exposure to high house prices and increasingly indebted Canadian consumers.
“The underlying trend for the market is upward, but the problem is there is some weakness in the economic numbers that I don’t think investors have fully factored in.”
David Kelly, chief global strategist at JPMorgan Funds
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