03/04/15   Fed Watching Remains A Wall Street Sport

Editor’s Corner

Ron Rowland

The Federal Reserve has been unable to extract itself from financial headlines for a very long time, and for good reason. Interest rates are at historical lows, and they have been there for what seems like a historical length of time. Whether this low interest rate environment is the lifeblood of the country’s economic engine or a narcotic to which the economy has become addicted remains debatable. Whichever it is, it has become status quo, and therefore, will induce much uncertainty when rates rise.

Although anticipating the end of monetary accommodation and predicting its ramifications has become its own industry, the Fed found other reasons to be in the headlines this week. The ethics and culture of Wall Street banks came into the cross hairs of Janet Yellen’s latest remarks. In her presentation to the Citizens Budget Commission yesterday, Ms. Yellen alluded that big banks still haven’t learned their lessons. “It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly”, she said in her rebuke.

Making sure her concerns were not shrugged off, she went on to say, “these incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.” The qualitative nature of recent “culture” and “value” discussions has bankers worried, especially since they come just days before the Fed determines whether the biggest U.S. banks have adopted appropriate risk controls. The Fed Chair is adding additional stress to the forthcoming annual large bank stress-test exercise.

Today, Fed watchers had another item to chew on – the release of the Fed’s Beige Book report of anecdotal information. The various regions were mostly upbeat in their assessments, and similar to a year ago, the weather was often blamed for any softness. Given the sharp and prolonged drop in oil prices, many oil and gas producers are cutting back on their capital expenditure plans according to the report. Wage pressures remain moderate, although some regions reported having to pay up for specialized skills. The market did not exhibit any reaction to the Beige Book report, indicating it did not contain any surprises.

Investor Heat Map: 3/4/15


For sectors, the strong got stronger and the weak got weaker this past week.  It was a classic example of momentum and trend following at work.  Consumer Discretionary has now completed four weeks at the top, as it appears consumers are plowing some of the money saved from lower gasoline prices back into the economy.  Strength in the semiconductor industry helped Technology keep its second-place ranking.  Health Care climbed a notch to third, and it is now challenging Technology for the number 2 position.  Health Care has been providing much of the upside leadership for months, and its recent slip in the rankings appears to now be reversing course.  Materials slipped a spot to fourth.  The middle of the rankings contains an unlikely mixture of Industrials, Consumer Staples, and Telecom.  The Financials sector continues to lag, and Real Estate’s recent drop puts it in a similar position.  Energy and Utilities are the only two sectors in the red again this week.  Both lost more ground and are now putting up double-digit negative momentum readings.


Growth continues to dominate Value in our style rankings.  All three Growth categories are residing at the top, and the three Value categories are relegated to the bottom.  The next level of market bias appears to favor smaller sized companies, with Small Cap Growth landing in the highest ranked position for a sixth week, followed by Mid Cap Growth and Large Cap Growth.  Micro Cap has been somewhat of an anomaly the past month or so, mysteriously aligning itself with Mega Cap.  That situation now appears rectified as Micro Cap shot four places higher, separating itself from Mega Cap and landing in fourth.  A jump like that results in a downward shift for the displaced categories, and Mid Cap Blend, Small Cap Blend, and Large Cap Blend all slipped a spot.  Mega Cap managed to pull itself up one notch, which pushed Mid Cap Value two places lower to form the Value congregation on the bottom.


The relatively consistent trends evident in the sector and style rankings are also visible in the global categories this week.  Nine of the eleven categories held their previous ranking positions, and the two that swapped places were minimally changed.  Japan sits on top for a second week as the yen remains near an 8-year low against the U.S. dollar.  China was on top two weeks ago.  It fell to second last week and remains there today, although its recent volatility is starting to erode its momentum.  EAFE and Euroland are the two positions swapping places with EAFE coming out on top.  The U.S. is still in the middle of the pack despite having many stock market benchmarks at or near all-time highs.  Momentum scores in the upper portion of the global rankings are relatively compressed but start to decline with World Equity, the U.K., and Pacific ex-Japan.  A larger drop-off is evident with Emerging Markets, although it continues to cling to a positive score.  Canada and Latin America are again the only two global categories in the red.


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.


“Reports from the twelve Federal Reserve Districts indicate that economic activity continued to expand across most regions and sectors from early January through mid-February.”

Fed Beige Book released on 3/4/15


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