Fed Stages A Ritual Sacrifice
Election day came in Greece, and the Continent appears to have survived. Parties desiring to keep Greece in the Euro were victorious. Whatever government emerges will face a tough job. We wish them well.
Today’s Federal Reserve policy meeting ended with an extension of “Operation Twist,” the bond- buying program that was set to expire this month. It will now continue through year-end and was also expanded by $267 billion. The Fed will spend that amount on U.S. Treasury securities with maturities ranging from six years out to thirty years. There had been some speculation about the Fed making direct purchases of mortgage-backed securities. That will not happen, at least for now.
The stated goal of Operation Twist is to keep long-term interest rates low, thereby stimulating businesses to create jobs. This seems unlikely to us; rates are already at historic lows, with little discernible impact on the unemployment rate. Today’s announcement looked more like a ritual sacrifice designed to please a restless population. We doubt it will help the economy.
Twist also has another potentially dangerous consequence. The Fed’s own portfolio will become substantially more rate-sensitive. At some point, the Fed will want to sell the vast quantity of Treasury securities it is accumulating. When that will be, and under what circumstances, is not entirely clear.
In any case, for now Treasury yields are still safely in a long-term downtrend. The stock market has recovered about half of its May decline, and June looks a little more positive. Falling oil prices are starting to be visible at the pump. Gold prices slipped a little but remained above $1600 even after the Fed announcement. The Federal Reserve seems to have calculated that inflation is nothing to fear. Perhaps not, but we have plenty of other fears.
Utilities is still the top sector in today’s chart, but Telecommunications is closing the gap quickly. We could easily see a leadership change in the next few days. Health Care now occupies the third slot with fourth-place Consumer Staples close behind. Consumer Discretionary improved to slightly positive momentum but stayed in the same relative position at #5. Four other sectors are right below: Financials, Industrials, Technology, and Materials. All are showing improvement, and we’ve also seen a few hints of relative weakness in the defensive sectors. This indicates a major sector rotation could unfold, but at this point it is too soon to identify new leadership. It probably won’t be Energy, which is still alone at the bottom.
We cannot recall ever seeing a more neutral lineup than today’s Style chart. Five categories are slightly positive, six are slightly negative, and none show any conviction. This is, nonetheless, quite an improvement from last week when all eleven showed negative momentum. As is always the case when dispersion is so low, relative positions don’t reveal much today. Mega Cap is on top, which is what we expect in a pessimistic market. Micro Cap is once again an anomaly at third on the list. The three Small Cap categories are ahead of the three Mid Cap benchmarks, which now reside at the bottom of the list. This may be random, or it may suggest a shift is imminent.
The U.S. is so slightly green you may need a magnifier to see it. Really, the color is there. The lackluster score for the U.S. reflects and confirms the neutral readings shown in the Style rankings. The U.S. is the only global category that has been able to shed the minus sign from its momentum reading. The United Kingdom, right behind with a small negative score, is hardly impressive but reveals the benefits of being a European nation without the shackles of the the European currency. The British pound sterling is alive and well. Pacific ex-Japan moved ahead of World Equity to third place, thanks to improvement in the Australia and Singapore stock markets. Rallies in Latin America and China boosted the Emerging Markets benchmark slightly ahead of the ex-U.S. developed-market EAFE category. Canada, Japan, and China are clustered right below. Latin America, despite the short-term strength mentioned above, still looks worse than almost everything else. The bottom is, of course, reserved for Europe. Some optimists think the time for bargain-hunting is almost here. They may be right, but we are not ready to follow just yet.
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.
“Come on let’s twist again like we did last summer. Yea, let’s twist again, twistin’ time is here.”
Chubby Checker, 1961
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