Like various market sectors and segments that come into favor and then fade away, headline news follows a similar path. The ongoing European financial crisis is far from over by most accounts. Even so, the countries that gave us the PIIGS acronym (Portugal, Italy, Ireland, Greece, and Spain) have seemingly disappeared from the front page. The U.S. debt ceiling, budget impasse, and sequestration promised to bring our country to a standstill, yet news rotation lives on. In addition, let’s not forget Cyprus. It dominated all financial news less than two months ago but will be lucky to get a mere mention in this week’s news cycle. Have things in Cyprus really improved that much? If so, then perhaps that should be the story of the week.
Ben Bernanke and the Federal Reserve are always good for supplying content lasting a news cycle or two. Over the past week, the Fed’s stimulus “exit strategy” became the focus. As you may recall, last September the Fed said it would ramp up its bond-buying program. Earlier this month (or a few news cycles ago), the Fed said it planned to continue the purchases until the labor market improves substantially and the purchase amounts may be adjusted to account for labor market or inflation changes. Last week, the talk turned to the exit plan – how to wind down the program, while preserving the ability to be flexible. Although this has moved off the front page already, there is a high probability it will return.
The media (and the public, too) seem unable to ignore a good scandal. This week seems made to order, led by allegations of IRS improprieties involving its scrutiny of certain tax-exemption requests. Citizens seem to achieve extra enjoyment when an organization such as the IRS comes under fire for overstepping its bounds. If that’s not enough on the scandal front, then add Benghazi hearings and a potential conflict regarding fund raising for ObamaCare to the list.
Last, but certainly not least, is the fact that the news itself is now news. It seems the Department of Justice seized phone records of the Associated Press several months ago, although we are just now learning about the event. Gary Pruitt, CEO of the Associated Press, put it bluntly when declaring “there can be no possible justification” for the government’s action. Since this one involves the press itself, perhaps they won’t be so quick to rotate the story off the front page.
We are in a period of rapid sector rotation. The widely predicted “Great Rotation” from bonds to stocks did not occur, at least not in any meaningful way yet. Those discussions have now shifted to the “Great Sector Rotation” out of defensive sectors and into cyclical ones. We have been commenting on this action for many weeks, although we are not convinced it is as simple and straightforward as some would like to portray it. For example, Consumer Discretionary takes over as the top-ranked sector today. As its name implies, it represents cyclical non-essential consumer spending and is certainly not defensive,. However, contrary to what you may have heard, it has been an above-average performer throughout 2013 instead of a new rising star. This week’s second place sector, Financials, is a similar story. It has never been a defensive play, yet it has been a top performer so far this year and held first place honors in our rankings for many weeks.
In our view, the “defensive sector” story received too much attention. The defensive sectors of Utilities, Health Care, and Consumer Staples did rise to the top, but their reign was rather brief. Today, the group is no longer a group. Instead, they are scattered across the rankings. Blunting the “decline of defensive sectors” argument, Health Care was the best performing sector the past week, jumping from seventh place into a tie for second place. Utilities went the opposite direction. It was the worst performing sector and plunged from fifth place to the bottom of the rankings. We’ve had a new leader each of the past four weeks, more a sign of rapid rotation versus a great rotation.
The Style rankings have been so compressed the past month or two that a shake-up was inevitable. Today, we have a new leader for the first time in weeks, as Mid Cap Growth pushes aside Mid Cap Value. Small Cap Growth, long the bottom dweller, moved up to ninth a week ago and surged to third today. The rally has been helping all stocks, and like the rotation in Sectors, shifting strength across the Style categories is a sign of broad market participation. Mega Cap remains at the bottom of the heap. However, with a momentum reading of 30, indicating an intermediate-trend of +30% per year, that position carries no shame today.
Our readers know that currency fluctuations play a big part in the relative performance of our Global ranking categories. The U.S. dollar was quite strong this past week, gaining more than 1.5%, and climbing further today. This is a big move in the currency world, and as one would expect, it helped the U.S. move up to grab and solidify its second place position. Japan is still number one though, with a stock market so strong that it is able to overcome the effects of a rapidly declining yen. As an export-driven economy, a weaker yen helps Japan be more competitive in a global market place. This helps boost stock prices there enough to swamp out the currency impacts. There are funds that invest in Japan while hedging out the yen exposure, and they are performing even better than the representation in the accompanying chart.
Developed markets continue to dominate. Falling in line behind Japan and the U.S. are EAFE, World Equity, Europe, U.K, and Pacific ex-Japan. Our trio of developing markets, along with Canada, remains mired at the bottom of the stack. Emerging Markets and China managed to hold on to small but positive momentum scores, but Latin America has once again slipped into a negative trend.
“For most folks, no news is good news; for the press, good news is not news.”
Fed Gloria Borger, American journalist
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