Euros Stalling for Time
U.S. stock benchmarks popped higher on Tuesday and continued to rally today. Some three-quarters of the S&P 500 companies managed to beat quarterly profit expectations. Given that those expectations are set by the same analysts who less than two years ago were missing wildly in the other direction, we are not sure the celebration is justified. Fighting the tape is rarely a good idea, however, so we suspect the worst is over in the short-term.
Following a few days of shock, traders seem to have concluded the Greek debt situation will not spin out of control – at least not soon. Other European leaders issued a largely non-specific pledge of support, followed by vague demands Greece take “necessary measures.” The Greeks, for their part, deny asking anyone for help and insist all is well. As we noted last week, both sides seem to think if they stall for time the problem will go away. They are wrong, but negotiations could stretch on for a long time.
U.S. investors should not gloat too much. The truth is that more than a few of our own brand-name institutions, and even some of our states, are in just as much trouble as Greece. The challenge has thus far been handled through the creation of new liquidity. Statistics like industrial production and housing starts prove that vast amounts of cash can, in fact, stimulate economic activity. The other side of the ledger is more problematic, for at some point the liquidity must be withdrawn. Minutes of the most recent Federal Reserve policy meeting indicate that Fed officials are aware the stimulation cannot go on forever. The critical questions are how to stop, when to stop, and what will happen then.
The prospect of monetary tightening – or at least an end to the loosening – is pushing Treasury yields higher. The ten-year bond rate ended today at 3.74%, the highest level in more than a month. Some near-term consolidation of this move seems likely, but another run up to the 4% area where rates topped out last year is entirely possible. This is good news for the U.S. Dollar but will probably not be helpful for gold and commodity prices. Gold has bounced a bit but is still well below the peak set back in early December.
Recent action brought some improvement in overall momentum, but the relative sector positions had only minor shuffling. Consumer Discretionary is on top of the list, followed by Health Care and Consumer Staples – the same top three as last week. Utilities broke down and is now parked near the bottom, its weakness exceeded only by Telecom. Materials made a significant jump from second-last up to the middle of the pack. As noted above, we are not sure this sector will get much further help from natural resource prices.
The almost-undifferentiated Style pattern is still in place but, unlike last week, a few categories are now trending upward. The Micro Cap group vaulted into first place, but six other categories are so close behind that the relative positions can change dramatically. Mid Caps are still in favor while Large Cap and Mega Cap are lagging.
If not for Europe and China on the bottom, our Global Edge chart would look much like the Sector and Style charts. The picture for most world markets improved substantially in the last few days. Canada is now in first place and is the only world market showing an intermediate-term uptrend right now. The U.S. and Japan are close behind, leaving the top three unchanged since our last report. Latin America lifted itself out of the basement, leaving the EAFE benchmark to join Europe and China at the bottom.
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.
“When people start to fear that the numbers aren’t accurate, they fear the worst.'”
Simon Johnson, former International Monetary Fund chief economist
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