Surprise! Economy Not So Good
Today a salvo of disappointing economic reports halted a four-day win streak for U.S. stocks. In fact, today’s market selloff nearly erased the entire advance of the past week. ADP Employer Services estimated companies added only 38,000 workers in May, far below consensus forecasts. Labor Department employment numbers, due out Friday, could either confirm or reverse the ADP reaction. The jobs concern comes on top of a big drop in consumer confidence.
To us, the bigger surprise is that anyone is surprised consumers are losing confidence. Those who have visited a gas station or grocery store this year already know times are tough. Further confirmation can be found in the S&P/Case-Shiller housing price index – now at its lowest point since March 2003. With employers not hiring, housing prices still falling, and the cost of basic necessities flying higher, a lack of confidence isn’t exactly news.
We are beginning to see more of a disconnect between stock and bond prices. Today the ten-year Treasury yield sliced below 3% as analysts suggested the Fed may have to put QE3 back on the table. Equities, which had previously welcomed any and all stimulus, did not react positively this time. Other factors could be at work, but this discrepancy bears watching.
In Europe, intense negotiations are underway on how to divide the losses from Greek government debt. We suspect the authorities will find some way to further delay any real resolution – primarily because they know they are setting a precedent for how Spain, Portugal, Italy, Ireland and perhaps others will be treated.
In short, as summer begins there is little cause to celebrate on either side of the Atlantic. Stocks reached a three-year high in April thanks not to a recovering economy, but to rising profits. The profits came from higher productivity and stagnant wages, not consumer spending. We may see a long, hot summer in the financial markets.
Telecom climbed into the top sector spot. A battle over the next generation of internet technology is making portfolio managers rethink their weightings. Many players, like Nokia (NOK) and Microsoft (MSFT), are firming up their partnerships, which may be a sign of things to come. Health Care is right behind Telecom but seems to be slowing its advance. Consumer Staples and Utilities were the only two categories we track to actually lose momentum since last week. Both still moved up in price, however, so we do not yet see a rotation away from the defensive sectors. The week’s big winner was Energy, which jumped ahead of Materials and Industrials to the middle of the pack. Financials remained in last place despite surprisingly good performance from the real estate segment.
A four-day rally helped bring all the Style categories back to positive momentum, but today’s negative action will likely cause this to unravel. Dispersion tightened up somewhat in the process with just 15 points now separating first place from last. The Growth categories all posted better advances that their Value and Blend counterparts. Mid Cap Growth held on to first place and Small Cap Growth jumped ahead to reclaim the #2 spot. Large Cap Growth performed well, but still slipped in rank due to strength in the Small Cap categories. After escaping from the bottom for a couple of weeks, Mega Cap is once again in last place.
For the second week in a row, we have a major shake-up in the Global rankings. Currency trends are playing a significant role. This week, general weakness in the U.S. Dollar and strength in other currencies boosted the performance of international markets. Nine of the eleven categories are now positive, but not by much. A re-run of last week’s dismal chart is entirely possible. On a relative basis the U.K now leads, followed by the U.S. and China. The latter broke out of its short-term downtrend, a feat Latin America could not match. Japan is still on the bottom by a comfortable margin.
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.
“Home prices continue on their downward spiral with no relief in sight.”
David Blitzer, Standard & Poors, 6/1/2011
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