The Federal Reserve released the minutes of its March 18-19 meeting earlier today. The minutes revealed the Fed held an additional meeting on March 4. The purpose of that earlier videoconference was to discuss the possible “reformulation of the guidance language” used to telegraph potential changes to Fed policy. The former reference to achieving an unemployment rate of 6.5% before considering interest rate hikes was of particular concern.
Like many investors, the Committee recognized the “6.5% threshold for the unemployment rate was becoming outdated” since that level was quickly approaching. Members had previously expressed their concern that the unemployment rate was not capturing the true employment environment due to distortions caused by the large exodus of people from the labor force. The Fed did indeed drop the unemployment threshold from its post-meeting statement on March 19.
On the subject of employment reports, the Bureau of Labor Statistics released its March reports last Friday. Data mined from the establishment survey was used to claim the economy had achieved a major milestone – the 8.8 million jobs lost during the recession were now replaced. However, this figure fails to account for population growth, and when doing so, it reveals another 7.2 million jobs will be needed before breaking even. Despite claims of “all lost jobs now recovered,” the reality is we have only recently crossed the halfway point on a population-adjusted basis.
Another interesting tidbit from the household survey showed the number of employed Americans jumped by 476,000 in March, yet the unemployment rate held steady at 6.7%. That’s because the labor force grew even faster, adding 503,000 people to its ranks. Meanwhile, the number of unemployed grew by 27,000 on top of the 223,000 growth in February. The employment story has not concluded.
Greece has been out of the headlines for a while, but the country is set to issue new 5-year bonds tomorrow. These securities are expected to yield around 5%, which is much more than the governments of Portugal, Spain, and Italy must pay to borrow money. At the same time, it is much less than the dark days of the 2012 Greek financial crisis, when 20% yields were required to attract investors.
It’s interesting to watch the pendulum of corporate reaction swing from one extreme to another. We are currently witnessing a large swing toward automotive recalls. Most everyone would agree that automobiles are probably safer now than they have ever been. Yet, we are seeing an unprecedented number of new recalls in the wake of recent government actions. Toyota Motors (TM) was slapped with a $1.2 billion fine for misleading consumers about sudden acceleration problems. General Motors (GM) went before Congress regarding ignition switch issues and is now paying fines for failure to deliver additional information. Given the current environment, automakers seem to be erring on the side of caution when making recall decisions.
The Utilities sector continues to dominate the U.S. investment landscape as nervous investors seek income and stability. Real Estate, another income oriented category, made the climb from fifth to grab the second-place spot. Energy held on to third place amid rising oil prices. Telecom slipped two places to fourth while Materials backed off a place to fifth. Consumer Staples usually benefits in times of investor discomfort, but that has not been the case during the pullbacks of the past few months. This week appears to be different with the defensive category rising three places in the rankings. Industrials, Financials, and Technology remain below-average for intermediate relative strength. Health Care lost its positive momentum as the selling of biotech shares spread to pharmaceuticals and managed services. Consumer Discretionary also flipped over to red as the outlook for consumer spending ebbs.
Mid Cap Value took the top spot a week ago and holds it again today with Large Cap Value close behind. The market is starting to favor large company stocks. Large Cap Blend and Mega Cap both improved two spots, displacing Small Cap Value and Mid Cap Blend in the process. Large Cap Growth also improved, but it still trails the other Large Cap categories by a significant margin. The bottom four categories flipped over to negative momentum because of the market’s downdraft on Friday and Monday. Micro Cap dropped two places, and its move solidifies the lower right-hand corner of the style box as the weakest area.
Latin America put together back-to-back positive days on Friday and Monday while most of the world was taking a drubbing in stock market trading. Its impressive rally of the past three weeks is encountering resistance now, but the region is on the cusp of breaking free of its long-term downtrend. Emerging Markets secured second place as last June’s lows were not breached in the February selling, and a new rally appears to be underway. Pacific ex-Japan climbed another notch as Australia tries to shake off its one-year slump. Europe maintained its momentum but was pushed down two spots in the relative rankings. Canada broke through overhead resistance and pulled itself into the upper half of the global rankings. World Equity and EAFE held relatively steady, and China posted an improvement. The U.S. tumbled four spots to ninth as recent selling took most of the wind out of its sails. The U.K. managed to hold on to its small slice of positive momentum, and Japan slipped further into the red.
“With respect to forward guidance about the federal funds rate, all members judged that, as the unemployment rate was likely to fall below 6-1/2 percent before long, it was appropriate to replace the existing quantitative thresholds at this meeting.”
FOMC Meeting Minutes for March 18-19, 2014
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