Looking backward, economic reports put a damper on any signs of stock market euphoria last week. Both ISM reports indicated broad slowdowns in growth, initiating investor caution. However, it was Friday’s jobs report that really caught everyone by surprise. The forecast was for 193,000 new jobs – enough to keep the unemployment rate unchanged at 7.7%. However, the actual report fell far short of expectations with payrolls increasing only 88,000. Even though the number of jobs fell 105,000 short, the headline unemployment rate surprisingly dropped to 7.6%. Once again, the reason for this discrepancy is the unusually large number of people leaving, or abandoning, the workforce. The Labor Department said that nearly half a million (496,000) people left the job market in March, bringing the labor-force participation rate down to 63.3%, its lowest level since 1979.
If you wanted to see upside movement last week, then Japan was the place to look. Japan embarked on a massive quantitative easing effort known in some circles as the “2” plan. The goals include 2 percent inflation in two years that will double the monetary base while doubling the Bank of Japan’s bond purchases. The plan is nothing if not bold. Additionally, “bold” is what Japan needs, as 20 years of “not so bold” has proven to be ineffective. The new approach has its skeptics, but a senior dealer at Mizuho Corporate Bank gives it a “120” on a scale of 1 to 100, according to Friday’s Wall Street Journal. Investors seem to agree as the Tokyo Nikkei soared 6.9% in the last half of the week, the yen plunged 5%, and the Japanese 10-year government bond yield fell to 0.44%. This week, Japanese markets are adding to those trends.
Looking forward, earnings season has begun again. The bar has been set low with analysts expecting first quarter results to show only a 1.5% gain from a year ago. That is a huge drop from the 4.3% improvement they were forecasting at the start of the year. Preannouncements have run 108 negative and only 23 positive. That 4.7:1 ratio is the most negative since the third quarter of 2001, when the 9/11 terrorist attack and economic recession dominated the headlines. Current predictions vary widely by sector with Financials expected to show the strongest yearly change of +10.8%. Other growing sectors include Consumer Discretionary +7.8%, Telecom +5.9%, Consumer Staples +3.3%, Materials +1.9%, and Utilities +1.2%. The four sectors expecting to show declines are Industrials -1.9%, Technology -2.5%, Health Care -3.5%, and Energy -4.3%.
Looking backward and forward, the Fed prematurely released its minutes from the last FOMC meeting today. The report itself contained nothing very surprising about the Fed’s future actions. Growing dissention within the Fed regarding when its bond-buying program should start winding down is nothing new. Today’s early release was the item that grabbed everyone’s attention. The Fed decided to publish the minutes a day early after learning the report was “accidently” revealed to Congress and some trade groups. The Federal Reserve notified the SEC and CFTC of the incident, and it is prepared to cooperate in any regulatory evaluation. Meanwhile, investors appear to like what they saw, pushing the S&P 500 and Dow to new highs.
Utilities, sitting in third place a week ago, finished its climb up the rankings and now occupies the top spot. It accomplished this task by posting another strong week while Health Care, the former leader, entered a short-term consolidation phase and slipped to second place. Real Estate was a big mover, jumping from sixth to third. International Real Estate has been even stronger, but our category represents only the domestic market. Consumer Staples slipped to fourth. Telecom was another big mover, surging from ninth all the way to fifth. Consumer Discretionary and Financials both slid downward a couple of spots, while Industrials and Energy moved one position lower. Materials and Technology bring up the rear again with Technology back on the bottom after a one-week hiatus.
The market prefers Value to Growth across all capitalization strata. Mid Caps have a slight advantage to Large Caps, as each Mid Cap classification has its Large Cap counterpart right on its tail. Mid Cap Value remains the overall leader, followed by Large Cap Value. The two Blends come next and the Mid Cap Growth / Large Cap Growth pair round out the top six. Mega Cap managed to climb out of last place to land in seventh this week. This leaves the four smallest capitalization segments at the bottom, with Small Cap Growth landing in the lowest ranked spot.
Japan was losing ground a week ago, and we mentioned that it could lose its first place ranking if it continued to falter. Instead, the opposite happened. Japan posted the best one-week performance of any equity category, putting considerable distance between itself and the U.S. in second place. The next three groups are tightly bunched, with Pacific ex-Japan slipping behind World Equity and EAFE this week. The U.K. is in sixth again, and it is now the lowest ranked region still having a positive trend. Unlike the Sector and Style rankings where everything is currently positive, five of the Global categories are reporting negative trends. Latin America and Europe head up this list of laggards. Canada joins Emerging Markets near the bottom, while China strengthened its grip on last place.
“I will not use my fighting power in an incremental manner.”
Haruhiko Kuroda, new Bank of Japan chief
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