06/18/14   The Predictable & Boring Fed

Editor’s Corner

Ron Rowland

At the conclusion of today’s FOMC meeting, the Fed announced it would keep interest rates unchanged and reduce its bond-buying program by another $10 billion per month.  So predictable and so boring, yet this is a good thing.  The market has had few, if any, negative reactions to Fed policy statements when they conform to analysts’ expectations.  It is the surprises that tend to shock the market.  When it comes to the Fed, it really is a case of no news, or perhaps no surprises, is good news.

The opening paragraph of today’s post-meeting press release sums up the Fed’s view rather succinctly by stating, “Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months.  Labor market indicators generally showed further improvement.  The unemployment rate, though lower, remains elevated.  Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow.  Fiscal policy is restraining economic growth, although the extent of restraint is diminishing.  Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.”

Some analysts literally examine the statement word-by-word and compare it to previous ones.  This process will likely find some words that did change, although we doubt they will carry much significance.  Today’s meeting was accompanied by the release of the Fed’s Summary of Economic Projections and a press conference by Chair Janet Yellen.

The most significant change in the forecast was the lowering of 2014 GDP from a range of 2.8% to 3.0% down to 2.1% to 2.3%.  Again, not much of a surprise as GDP reductions have been prevalent this year.  The unscripted portion of Ms. Yellen’s post-meeting press conference contained the highest probability for a potential surprise, but none were revealed.  All in all, it was another uneventful FOMC meeting, just what the markets ordered.

One item some analysts were watching for was whether the Fed would follow in the footsteps of the European Central Bank (“ECB”) by declaring negative interest rates.  To spur lending, drive down the value of the euro, and help bring about a small increase in the inflation rate, the ECB recently imposed an interest rate of negative 0.1% on the reserves other banks park at the central bank.  Euroland banks will effectively be charged a 0.1% fee as opposed to receiving interest from the ECB.

Investor Heat Map: 6/18/14


Energy is the clear leader in the sector rankings today, extending its lead by a significant margin.  Technology has emerged as the primary challenger.  It has managed to separate itself from the pack, but it is still far behind Energy.  Strength for Energy is coming from higher oil prices while Technology is benefiting from improvements in semiconductor stocks.  The next six categories are tightly bunched, which lowers the significance of their relative order.  Materials climbed a spot to third, while Industrials slipped two places to fourth.  Financials, Consumer Staples, Health Care, and Utilities all moved one spot higher as Real Estate dropped from fifth to ninth.  Consumer Discretionary and Telecom remain the laggards.


Growth is trying to reassert itself, but Value still has the upper hand.  The top seven categories lost momentum and shifted positions slightly, but not much has really changed.  Mid Cap Value and Large Cap Value remain first and second, while Mid Cap Blend moved ahead of Large Cap Blend to claim third.  Mid Cap Growth moved up two spots to fifth, pushing Large Cap Growth down a notch in the process.  Small Cap Growth was the only style category to post a momentum increase for the week.  It swapped places with Small Cap Value, which now finds itself just one rung off the bottom.  Micro Cap still occupies the lowest-ranked slot.


China recaptured the top spot after a one-week absence.  Canada, rich in oil and other natural resources, jumped from seventh to second and posted the largest momentum increase among the global categories.  Emerging Markets slipped from first to third, dragged down by last week’s pullback in Latin America.  Japan moved into the upper half as the U.S. slid two places to sixth.  World Equity fell a notch and EAFE climbed one to bring themselves together in the rankings.  The U.K. pulled itself up out of the basement, while the E.U. plunged five places to tenth.  Pacific ex-Japan, a region that typically benefits from strength in Energy and Materials, has fallen to last place as both the stocks and currency of Australia weakened.


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.


“By and large, my own assessment is that credit is broadly available in the economy. But there are some exceptions [including mortgage credit].”

Fed Chair Janet Yellen, 6/18/14


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