06/19/13   Stimulus Taper Off – Bernanke Taper On

Editor’s Corner

Ron Rowland

The Fed’s two-day policy meeting concluded today with no change in its bond purchase program.  The taper is off for now.  Eventually, a reduction in the $85 billion of monthly purchases is inevitable; it’s just a small matter of timing.  Prior to May 22, the consensus was that the Fed would continue on its current path through most of 2013, begin to taper late in the year and end the program mid-2014.  Four weeks ago, Fed Chairman Bernanke raised the possibility that tapering of purchases could begin much sooner, perhaps as part of today’s and July’s FOMC meetings.

The possibility of the Fed removing stimulus from the system has put investors on edge the past month, placing today’s meeting firmly in the media spotlight.  It wasn’t too long ago the Fed said purchases could go either way, increase or decrease, depending on various conditions.  Today, they reiterated that possibility, which should mitigate much of the fear regarding imminent tapering.

Additionally, interest rates were left unchanged at their near-zero level.  The Fed reiterated its intention to keep this accommodative stance as long as unemployment remains above 6.5% and inflation remains below 2.5%.  As part of today’s announcements, the Fed released its latest economic projections, which do not show the unemployment rate dropping below 6.5% until late 2014.  None of the inflation forecasts exceeded 2.0%; therefore, we are looking at near zero interest rates for another year.

In the post meeting press conference, Chairman Bernanke stressed there has been no change in policy, only in the Fed’s efforts to communicate that policy better.  He also emphasized that the unemployment and inflation levels discussed above are “thresholds” and not “trigger” levels.  In other words, reaching these levels will cause the Fed to begin considering changes to policy instead of automatically triggering changes.  He also said there would be a significant amount of time between the end of the asset purchase program and the raising of interest rates.

Adding to the uncertainty of Federal Reserve policy making is increasing speculation that Mr. Bernanke will likely not continue his role as Chairman when his term expires in January.  Executing policy changes will become that much more difficult with a lame duck Chairman.  It may even delay those changes until his successor is in place.  Meanwhile, Bernanke will not be attending the Kansas City Fed’s renowned Jackson Hole conference in late August.  The Bernanke taper has begun.

Investor Heat Map: 6/19/13


Consumer Discretionary maintains the top position for the second week in a row, breaking a string of weeks where first place alternated between it and Financials.  Health Care and Industrials both improved, thanks to the low volatility of their upward trends.  Financials slipped from second to fourth as strength in broker-dealers could not offset the relative weakness of banks.  Technology’s recent rise in the rankings has stalled the past couple of weeks even though semiconductors are moving higher.  Telecommunications and Energy swapped places in the lower portion of the relative strength rankings.  Utilities and Real Estate remain the only two sectors in negative trends, with Real Estate unable to shed its last place stigma.


Micro Cap has now completed three weeks at the top of the Style charts.  Small Cap Growth is closing the gap and will likely be a worthy challenger in the weeks ahead.  The Russell 2000 Index is the primary benchmark for small capitalization stocks.  Russell performs its annual reconstitution in late June, and that activity usually brings some extra excitement and volatility to small stocks as index funds buy and sell positions to keep in sync.  The Russell 2000 closed at 999.99 yesterday, an all-time high that barely missed the 1,000 milestone.  There are no changes in the upper tier of the Style rankings this week, with Large Cap Value finding a place among all the Small Cap categories.  Some minor shifting occurred in the lower tier, but given the tight compression of momentum scores, the changes do not have much significance.


Equity markets rallied in many parts of the world this past week, improving the overall complexion of our Global rankings.  The U.S. and Europe remain at the top and still have sizeable leads over the other categories.  Japan was the big winner this week, jumping from sixth place to third.  Markets there have been very volatile, often swinging more than 5% on any given day.  Japan’s stimulus efforts are receiving mixed reviews from analysts.  One of its goals was to drive down the value of the yen, yet it has risen nearly 10% against the U.S. dollar since May 22.  Canada is showing improved performance, although it is not yet enough to boost its ranking or to overcome its negative trend.  Pacific ex-Japan surged this past week, but its prior decline was so steep that the improvement looks minimal on a longer-term chart.  Many developing markets were absent from this week’s rally.  China and Latin America actually worsened their scores, with Latin America firmly entrenched in a steep downtrend.


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.


“Fiscal policy is restraining economic growth.”

From FOMC Statement of June 19, 2013


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