Reality Check – Nasdaq Loses 40% Past 12 Years
Fed chairman Ben Bernanke began two days of semi-annual Congressional testimony this morning. We are not completely sure what traders wanted him to say, but they clearly didn’t like the way he started. Treasury yields spiked higher just as Bernanke took the microphone. Twenty minutes later, stocks hit a brief but frightening air pocket.
Our best guess at an explanation is that Bernanke failed to drop enough hints that the Fed plans further monetary easing. The chairman’s economic comments were characteristically non-committal; he sees “positive developments” in the job market but said conditions remain “far from normal.” He also conceded higher energy prices could cause “temporary” inflation.
The comments also hit gold bullion and commodities-related stocks. If the Fed has no plans for further easing, the outlook for hard assets is relatively less attractive. Gold prices did manage to hold near support, however, so the inflation story isn’t completely dead. If the Fed doesn’t inflate, the European Central Bank will. In fact it is already doing so; the ECB today handed out the equivalent of $712 billion in another round of three-year loans. Some 800 banks took advantage of the deal.
Stock market benchmarks are flirting with round numbers again. The Dow Jones Industrial Average closed over 13,000 yesterday, and the Nasdaq Composite touched 3000 prior to Bernanke’s speech today. Being old enough to remember Nasdaq 5000, we are somewhat amused at the attention to the latter. We fail to see cause for celebration when an index is still 40% off its peak nearly 12 years later.
10-year Treasury yields ended today with an increase to 1.98%. The intraday range was wide, ranging from 1.92% to 2.01%. This may not seem like much, but it is about a 4.7% spread. This, too, is related to Bernanke’s comments. If the Fed, being the biggest buyer of T-bonds, slows down its activity then rates will have to rise to attract other investors. Fortunately (or not, depending on your perspective), the “safety” of U.S. debt should be enough to keep rates historically low. That is no doubt what Bernanke thinks, and we think he is probably right.
Technology maintained its top ranking and added some distance between itself and the #2 sector, which is now Consumer Discretionary instead of Financials. The latter continued performing well, but retailers did even better. Energy climbed enough to take the #4 spot despite a retreat in crude oil prices. Industrials and Materials both slipped a notch to make room for Energy. The bottom four sectors stayed the same. The best of that foursome, Health Care, is more aptly grouped with the middle-ground sectors. Telecom, Consumer Staples, and Utilities brought up the rear with Utilities in last place. Of the ten major sectors, only Consumer Staples managed to trade in positive territory throughout most of today’s volatility, lending credibility to its “defensive” label.
The Style spectrum has little differentiation again, and indeed the rankings are even more compressed than last week. The Growth/Value distinction became a bit more obvious, however. The three Growth categories are at or near the top, while the Value groups are the last three on the list. This, of course, leaves the Blend categories in the middle along with Mega Cap, which happens to be a blended category. The one anomaly is Micro Cap, which also represents a blend but is presently behaving more like the Growth categories. Small Cap Growth is our current leader.
Emerging Markets held on to first place thanks to strong weekly results in Russia, Brazil, and China. The long-suffering EU moved up to second place as the Euro currency strengthened and investors at least tried to put the Greece meltdown fear behind them. Latin America advanced a notch to third place based mainly on strength in Brazil and Chile. China slipped to fourth place, virtually tied with the U.S. and Japan. Japan was the week’s big mover in both absolute and relative terms. Yen weakness helped equity prices in export-driven Japan, and equity gains more than offset the currency losses when converted back to U.S. dollars. The resource-heavy Canada and Pacific ex-Japan benchmarks had a good week but remained in the bottom two slots.
“In light of somewhat different signals received recently from the labor market than from indicators of final demand and production … it will be especially important to evaluate incoming information to assess the underlying pace of the economic recovery.”
Fed Chairman Ben Bernanke in testimony to House Finance Committee, February 29, 2012
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