03/16/16   Common Wisdom Is Not Always Correct

Editor’s Corner

Ron Rowland

Sometimes FOMC meetings are among the most widely anticipated events in the financial world, and other times they seem to occur without anyone noticing. The U.S. Federal Reserve Board completed a two-day FOMC meeting earlier today. If this meeting snuck up on you, then you are not alone. The Fed has made it a point to try to telegraph their intentions well ahead of these meetings. They have not generated any signals or clues that this FOMC meeting will result in changes to Fed policies, especially as they relate to interest rates. With nothing imminent or anticipated, the usual pre-FOMC meeting financial news coverage was missing this time around.

The last FOMC meeting of importance happened three months ago. After seven years of leaving interest rates in the dirt, the Fed took steps to raise interest rates in December. The Fed’s zero-interest-rate policy (“ZIRP”) had finally come to an end. Technically, the rate was previously pegged to a range of 0.00% to 0.25%, and the December move increased the rate by 0.25%, resulting in a 0.25% to 0.50% range.

To no one’s surprise, today’s post-meeting announcement left interest rates unchanged. However, the Fed’s forecast regarding future rate hikes did catch some people off guard. Previously, the Fed was forecasting that four additional bumps in interest rates would occur in 2016. Today, they lowered that forecast to just two more hikes. Assuming the next few hikes will be a quarter of a percentage point each, the year-end forecast is now 0.75% to 1.00%.

Common wisdom says that leaving interest rates at zero for seven years would stoke inflation. Gold, often viewed as a store of value and an inflation play, instead lost more than a third of its value during the last four years of the Fed’s ZIRP. Common wisdom also believed that U.S. Treasury prices would crater once the Fed started raising rates. Instead of falling in price, the iShares 20+ Year Treasury ETF (TLT) has jumped about 5% since that time. Coincident with the Fed announcement in December, gold ended its bear market and subsequently moved 17% higher. It is good to understand common wisdom, but it’s probably not a great idea to blindly follow it.

Investor Heat Map:3/16/16


For the first time in ten weeks, the sector rankings are skewed to the positive side. Today, we have a new leader. Telecom has taken the helm and pushed Utilities a notch lower, ending its seven-week reign. Telecom has resided in the top-half of the rankings since the last week of December, boosting its reputation as a defensive sector during the market decline of January and February. This week, it broke out to a new 15-year high and is displaying true leadership qualities. Utilities was the only sector losing momentum this week, as investors rotated to more aggressive market segments. Consumer Staples and Industrials solidified their third- and fourth-ranked positions. Three sectors made the transition from red to green, as Real Estate, Materials, and Consumer Discretionary put the number of sectors displaying positive momentum at seven. Technology is close to making the jump to green but remains slightly negative for now. Health Care, Financials, and Energy continue to lag, with Energy moving back down to last place.


Style category momentum scores widened this week— the strong got stronger, and the weak got weaker. Mid-Cap Value held on to the first-place ranking it achieved a week ago and widened its lead over the remainder of the field. Mid-Cap Blend moved a spot higher to second place, giving these two Mid-Cap categories a solid claim to the top. Mid-Cap Growth is the Mid-Cap outcast, moving a spot lower, unable to get itself out of the lower half. The “big shift” a week ago that resulted in all three of the Value categories residing among the top-four spots was partially undone this week. Small-Cap Value appears to have become volatile, jumping from eighth to second a week ago, and plunging back down to sixth today. However, on closer inspection, its momentum score places it in a virtual three-way tie for fourth-place. Viewed in that context, it didn’t really fall all that far and lends credibility to a claim of all three Value categories being “near” the top. Micro-Cap and Small-Cap Growth remain in the red, and both lost more momentum this past week.


The global rankings are showing signs of stability, with the top-six categories landing in the same order as they were a week ago. Additionally, and perhaps more importantly, the last five global categories to make the transition from red to green did so this week. Latin America maintains its first-place ranking, although the margin of its lead has shrunk slightly. Canada and Pacific ex-Japan have a firm grip on second and third. These top-three are known as resource-rich categories. They have vast land holdings, which lends itself to oil, mining, and commodity production. These groups have been in multi-year bear markets and are perhaps embarking on new bullish trends. Emerging Markets, the U.S., and World Equity round out the six categories, holding their same ranking positions as a week ago. As previously mentioned, the lower five categories all moved to green this week. Eurozone jumped from last to seventh and now leads this lagging group of five. The U.K. went the other way and fell three places to land on the bottom. EAFE, China, and Japan are wedged in between.



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.


“Global economic and financial developments continue to pose risks.”

-FOMC post-meeting press release and repeated by
Fed Chair Janet Yellen at her press conference (3/16/2016)


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