04/11/12   Fed Sees Steady Hiring, Doesn’t Reveal Where

Editor’s Corner

Investor Heat Map: 4/11/12Fed Sees Steady Hiring, Doesn’t Reveal Where

 

Equity benchmarks arrested nearly two weeks of decline today, thanks to a surprisingly good earnings season kick-off by Alcoa (AA).  Profit expectations are fairly low, so we may see more such surprises in the next few weeks.  On the other hand, additional weakness or consolidation would also be normal following this year’s strong rally.

European markets rebounded as well after an even rougher week than we had in the U.S.  History is repeating itself remarkably quickly in Spain; officials are denying the need for a bailout as vehemently as their Greek counterparts did last year.  The bigger reason stocks rose was probably the comment from a European Central Bank official suggesting intervention is on the table.

The March U.S. jobs report, released on Good Friday, seemed disappointing with employment gains of only 120,000.  The Federal Reserve is apparently unconcerned.  Today’s beige book release said the economy is expanding at a “modest to moderate” pace and “hiring was steady.”  The Fed is also unconcerned about inflation, though the report did note the possible negative impact of higher fuel prices.  There were no hints of further stimulus plans.

The Treasury bond market has seen some interesting action the last few days.  The ten-year yield fell below 2% yesterday for the first time in four weeks.  Concern about Spain seems to have been the main factor.  On the other hand, an auction for $21 billion in ten-year bonds today attracted surprisingly low demand. 

Three key issues seem likely to dominate headlines over the next week: earnings, Spain, and the Federal Reserve’s plans (or lack thereof).  Markets could easily be surprised into sharp moves in either direction – or could simply drift sideways.  The latter is our best guess.

Sectors

To no great surprise, every sector we track lost momentum since last week.  Some lost more than others.  Even so, the relative positions were mostly unchanged.  Technology kept the lead and even widened its margin over the #2 sector, which is now Consumer Discretionary because Financials fell to third place.  Health Care and Consumer Staples round out the top five.  Below that point, everything is heading downhill.  The negative-momentum club now includes Industrials, Materials, Telecom, and Utilities, but Energy is by far the most endangered sector –  proceeding downward at a -22% annualized rate.  A spike in oil prices could change the outlook quickly, of course.

Styles

The quandary of Mega Cap and Micro Cap co-existing at the same end of the chart resolved itself in the last week.  The Micro benchmark’s momentum score was sliced from 32 all the way down to 3.  This resulted in a drop from third place to seventh.  Mega Cap also lost momentum but kept its first-place ranking, followed by Large Growth and Large Blend.  Large Value is a little behind at #6, but that is still an improvement over the #10 rank it held last week.  We still see a preference for Growth over Value in the Large Cap and Mid Cap groups.  The Small Caps, however, are all in a dead heat with each other at the bottom end of the chart and are the only Style categories currently in the red.

Global

Relative strength fell hard around the globe since our last report.  The U.S. still holds the lead and now has the added distinction of being the only global category showing positive momentum.  The World Equity benchmark is still at #2 and shows a sideways trend.  Everything else is pointed down.  Japan held on to its third-place position.  Pacific ex-Japan zoomed up and now rounds out the top four.  Europe, dogged by new worries about Spain, slid down the ranks, as did the United Kingdom.  China is still in last place for now, though if short-term trends continue we may see the EU take that position soon.

 

Note:

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.
 

“There are definitely some structural headwinds…I think that’s why it is going to take a while to get back to where we were. It could take years to get back to the labor market that we saw in the years before the downturn.”

Spanish Michelle Girard, Senior United States Economist at the Royal Bank of Scotland, 4/6/12


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