Jobs Are Still The Missing Ingredient
Crude oil prices dropped to a two-week low today. This won’t mean any relief at the gas pumps, at least for now, but high prices are beginning to cut into gasoline consumption. Weekend road trips aren’t nearly as fun at $4 a gallon. The upside frenzy in gold and silver also paused, though probably due more to technical factors than any change in fundamentals.
Signs of economic weakness, however slight, were behind much of this week’s market action. Today’s ISM report showed the recent expansion in service industries slowed significantly in April. This Friday brings the monthly job report and possibly more clues to the economy’s prospects. Employment remains the key missing ingredient in this “recovery.” McDonald’s (MCD), for instance, received over 1 million applications in its recent national job fair. This means that it is now statistically more difficult to get a job at McDonald’s than to gain admission to Harvard.
Bond maven Bill Gross of Pimco made headlines a few weeks ago when he began short-selling Treasury securities. He may eventually be right, but the ten-year yield that was north of 3.61% on April 8 was south of 3.22% today. Maybe Gross was just early in his call. Bonds don’t seem to us like a good place to be short right now.
Finally, a note on the Middle East. Osama bin Laden’s removal from the geopolitical equation was long overdue, but we are dubious it will bring any significant changes. The region is still unstable – more than ever in some ways – and seems likely to remain so. This means crude oil will continue to carry a risk premium. Any economic recovery will also keep a floor under oil prices. A renewed global recession would bring down oil prices but at the cost of more pain elsewhere.
The last few weeks we’ve mentioned that sector rotation seemed to be bringing Health Care ahead of long-time leader Energy. That shift is now very evident on the chart. Where once Energy stood well above the crowd, Health Care is now comfortably in the lead. The large pharmaceuticals (aka “Big Pharma”) produced mostly upside earnings surprises, helping drive the sector to multi-year highs. Consumer Staples – another historically defensive sector – moved into second place as investors turned more cautious. Below these two is a vast middle ground with six sectors running neck-and-neck. This is typical during a rotation, since the former leaders and laggards must cross somewhere in the middle. Technology, despite a valiant attempt to take the lead in recent weeks, sank lower in the rankings. Financials are still in last place.
So far the Style rankings have not shifted into defensive mode, but they moved in that direction this week. Small Cap Growth and Mid Cap Growth are still in the lead, as they have been for months. The bottom didn’t change, either: Mega Caps continue to own that position. Yet we still see some notable changes. First of all, the top and bottom categories have moved closer together, with only 13 points separating them. Micro Caps, the most speculative of all the Style categories, dropped from the upper half to be part of a three-way tie for last place. The still-unresolved divergence between the relative strength of Small Cap Growth and relative weakness of Small Cap Value tipped a little toward Value. If short-term trends continue, the Style rankings could soon confirm the “defensive” theme we see in the Sectors.
Europe now holds a commanding lead over the rest of the world. Markets in Germany, France, Spain and across the Continent surged with the help of a strengthening Euro. Japan also had a good week, pushing EAFE (which is mostly Europe and Japan) into second place. Japan’s move erased its negative momentum and put it within shouting distance of Latin America. Japanese markets are closed for Golden Week, however, so we may see some adjustment when trading resumes. Australia came under pressure as both global commodity prices and the Aussie Dollar pulled back. This left Pacific ex-Japan in third place after being on top last week. Canada suffered a similar fate. China dropped from the upper half to near the bottom. If Japan can sustain a rally, China and Latin America are set to be the new cellar dwellers.
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.
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