Fed: Extended Period Means We Do Not Know
U.S. stocks stabilized a bit after a rough few weeks. The S&P 500 and Russell 2000 indexes both bounced off their 200-day moving averages last Thursday. Nonetheless, the downtrends that formed in April are still in place. Bulls should not celebrate just yet.
Greek drama filled the headlines this week. The prime minister survived a parliamentary confidence vote, but fiscal austerity measures remain highly unpopular with the public. Greek default seems to have been averted for now, although the story is far from over.
Today’s Federal Reserve announcement contained no surprises. QE2 will end as scheduled this month, but the Fed will stay in stimulation mode by reinvesting principal payments from its securities holdings. In his second post-policy meeting press conference, chairman Ben Bernanke said the economic slowdown is lasting longer than anticipated because of “temporary factors” like the Japan earthquake. We find this amusing, coming from a Fed chairman whose “temporary” stimulus programs have gone on for three years.
The ten-year Treasury yield remained relatively stable all week on the south side of 3%, but high-yield corporate (“junk bonds”) prices dropped hard on heavy volume last Thursday. Recent economic data suggests slow growth is the most likely scenario in the second half of 2011. Another outright recession seems unlikely. While better than some of the alternatives, “slow growth” won’t help millions of unemployed and underemployed consumers. For them, the last recession never ended.
Consumer Staples edged ahead of Health Care as the top-ranked sector, but the difference in momentum between the two is negligible. The more important point is that investors still look defensive. Consumer Staples, Health Care, Utilities, and Telecom are again the only sectors with positive momentum readings. Consumer Discretionary and Industrials moved ahead of Energy, but both remain in negative territory. Materials weakened amidst softness in commodity prices. Weakness in semiconductors combined with signs of life in some financial stocks to push Technology slightly below Financials as the bottom-ranked sector.
We have a four-way tie for first place in the Style rankings, and the entire chart is tightly bunched. Only 7 RSM points separate the top from the bottom. On a relative basis we see little change since last week. Mid Cap Growth is still on top followed by Large Cap Value. Micro Caps remain on the bottom. With such narrow dispersion, the ranking order is subject to significant change at any time.
Currency fluctuations again played a large role in the daily performance of most international investments the last week. Questions about the future of Greece, the Eurozone, and the Euro itself dominated the headlines, yet Europe’s stock markets are once again atop our relative strength rankings. The U.K., which was previously in the lead, dropped all the way to sixth place. The pound lost strength to the dollar, which in turn declined against the Euro. Gains in the Yen allowed Japanese stocks to hold steady, which is a victory in the current environment. Japan is now in fifth place. China did not improve and may soon undercut its February low. Large Cap China benchmarks are at about the same price as two years ago. Weakness in crude oil and commodities held Canada in last place.
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.
“The reason for the vague language is that we don’t know exactly how long it could take…The thrust of ‘extended period’ is that we believe we’re at least two or three meetings away from taking any further action, and I emphasize ‘at least.’”
Ben Bernanke, Federal Reserve Chairman (6/22/11)
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