The Best First Quarter in More Than a Decade
With one day remaining, the S&P 500 is on track to post its best first-quarter performance in 13 years. The Dow is closing in on a new 52-week high as merger and acquisition activity picks up. All the lights seem green for bullish investors.
The missing piece in this seemingly bullish picture is volume, which is running well below average. This leaves many observers skeptical the rally can last. Some wonder if it was all nothing more than reaction to Japan’s massive liquidity injections two weeks ago. Capital is fungible, so it is not surprising if the impact was global.
Consumer confidence plunged and inflation expectations surged in March, driven largely by rising gasoline prices. The confidence index remains higher than it was a year ago, however, so arguments for economic expansion are not entirely groundless. Friday’s monthly payroll report will be key once again. Forecasts continue to show a rebound in employment.
Housing also remains a big question mark. The latest data show existing home prices still on the decline, and it is beginning to show up in property tax appraisals. This, in turn, impacts the revenue of state and local governments, many of which are considering deep service cuts and possible higher taxes.
The U.S. Dollar fell today but was stronger for most of the last week. Nonetheless, the dollar downtrend that began last June is still in control. Commodity prices held relatively steady, and Treasury yields are near the mid-point of the trading range that began in December.
Technically, the equity benchmarks are at an important juncture. A breakout over the February peaks in the next few days would be a very bullish signal. A downturn or further consolidation may be more likely. With both jobs data and the end of quarterly window-dressing, Friday looks like it will be an important day.
Energy leads again, so we have to look elsewhere for surprises. This time last week Telecom was in a downtrend and second-to-last in the momentum rankings. Now it’s up to the middle of the pack and tied with Consumer Discretionary. What changed? The answer lies in Telecom merger activity and rumors, sparked by the acquisition of T-Mobile by AT&T (T). Energy lost some of its margin over other sectors but is still firmly in the lead. Materials is in second place. Technology managed to move off the bottom, leaving Utilities as the new cellar dweller.
The market rebound strengthened all segments of the Style spectrum. We are also starting to see the tightly packed rankings of the last few weeks widen out a bit. Small Cap Growth held on to the top spot and put some distance between itself and Small Cap Blend, the next strongest category. The Growth/Value axis is jumbled, with Growth at an advantage in the Small Caps, about equal in the Mid Caps, and lagging for Large Caps. The capitalization strata are much cleaner with strength inversely related to cap size. Small Cap and Micro Cap are on top, Mid Cap in the middle, with Large Cap and Mega Cap on the bottom.
Unlike the Style chart, the Global rankings became more compressed in the past week. With the exceptions of #1 Canada and last-place Japan, all categories show improved momentum. Canada’s margin over second-place Europe has almost disappeared. Emerging Markets jumped into third place and five of the six categories that were downtrending as of a week ago now look positive again. Japan is the only category in the red. With earthquake damage still creating a lot of uncertainty, Japanese stocks seem unable to rebound any further.
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.
“People are just not really feeling securely on their feet. That then comes back and limits their willingness to make a big investment in a house right now.”
Robert Shiller, Co-Founder, Case-Shiller Index
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