The Recession Is Still Over, At Least Officially
Signs of economic growth were everywhere in the last week. As we have pointed out, this is not especially surprising with the Fed pumping at a furious rate. The bigger question is how long it can last.
Gross Domestic Product in the U.S. rose at a 3.2% annual rate in the last quarter of 2010, compared to 2.6% growth in the third quarter. Consumer spending, which accounts for about 70% of overall demand, rose at a 4.4% rate. Obviously, the domestic economy has been slow to recover from the deep recession that officially ended in 2009. Nonetheless, the holiday season went well as consumers were lured by low prices and slight improvement in the jobs market.
The Egypt crisis that exploded late last week and dominated news over the weekend is far from over, and may yet spread elsewhere in the Middle East, but the market impact still appears relatively mild. The main effect has been in oil prices which suddenly carry a little extra risk premium. Since it is hard to imagine a scenario in which anyone’s interest is served by interrupting oil exports, we think the pressure may ease a bit soon.
Gold prices seem to have stabilized in U.S. Dollar terms following a downturn the previous two weeks. Sorting out the influences on gold is always a challenge, but we would not be surprised to learn that wealthy people in the Middle East shifted some of their assets into “hard money” recently. As it usually does when gold bounces, the Dollar declined. The Treasury bond market has been fairly quiet ahead of this Friday’s monthly employment report. A surprise in the data, either way, would create some action for bond traders.
The Energy sector has been in the lead for some time, but this week it is really standing out from the crowd. There is now significant distance between Energy and the next-strongest sector, Industrials. Materials, which fell briefly out of favor last week, rebounded to third place thanks to a strong commodity market and solid earnings reports. Technology and Financials round out the top half. The defensive trio of Consumer Staples, Utilities, and Health Care are once again on the bottom. Consumer Staples looks particularly weak. Unlike most market segments, Staples had only a very small bounce from Friday’s sell-off. The sector is very close to slipping into a negative trend.
If a picture is worth a thousand words, today’s Edge charts tell a good story. The Sector rankings reveal clearly where the strength is (and isn’t) with a large differentiation between the categories. The Global chart does the same. In Styles we have a completely different story. Taken alone, these rankings suggest the U.S. stock market is strong. Large Caps and Small caps are roughly equal, as are Growth and Value. With all segments equally strong, it suggests that investors don’t have to worry about being in the wrong style at this time.
The global rankings are very similar to what we saw last week. Europe remains on top and has actually improved its margin over #2, the U.S. Continued strength in the Euro is definitely helping. Canada improved thanks to strength in the Energy and Materials sectors. Japan fell a few notches but not for lack of effort. The Yen strengthened this week, and Japanese small cap stocks performed quite well. China is still on the bottom and remains the only category in a negative trend. China bounced a bit the past three days, but as yet it is not enough to change the intermediate-term picture. Latin America also remains weak and is on the verge of slipping into a downtrend.
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.
“If you look at the firms that came under pressure in that period … only one … was not at serious risk of failure … Even Goldman Sachs, we thought there was a real chance that they would go under.”
Ben Bernanke to the financial crisis inquiry panel
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