Double Dips Are Usually Only Good for Ice Cream
Last weekend we were greeted with the news that China would allow its currency, the Yuan, to float relative to the U.S. Dollar. Markets around the globe cheered the news on Monday, lurching forward with huge opening gains. The euphoria ended just as quickly, resulting in a downside turnaround for most markets that day. We’re not sure exactly what sparked the quick change of sentiment, but perhaps it was prescient due to the fact the actual exchange rate has changed little so far. We are of the opinion that one must take a longer term view, and that view would appear to be positive for investments in China.
Meanwhile, back at home in the U.S., new home sales plunged to their lowest level ever. That’s right – ever. After two huge months of increases, driven by tax-incentives, new home sales in May plunged -32.7%, also a record. Consumer sentiment is guardedly low, leading many economists to speak about the potential for a double-dip recession.
Today’s FOMC meeting seemed to echo that view as the Fed left interest rates unchanged and included the phrase “financial conditions have become less supportive of economic growth” as part of their statement. They do not view inflation as an immediate threat and plan to keep interest lows “for an extended period”. Reaction in the bond market was muted, and the downward trend in yields of the past few days remains in place. The 10-year Treasury yield ended the day below 3.12%.
A judge overturned the moratorium on offshore drilling. Many believe the drilling halt would lead to further destruction of business located along the Gulf of Mexico, only adding to the area’s economic problems. Crude oil prices backed off more than 2% today, and some analysts are claiming summer fuel prices have peaked for the year. BP continues to struggle with both technical and public relations issues surrounding the leak. The ultimate fate of BP remains in question.
The annual Russell rebalancing is scheduled to take place on Friday of this week. This often leads to increased short-term volatility for stocks, especially small cap stocks. The Russell 3000 will undergo 466 changes (combination of additions and deletions) this year. According to Bloomberg, rebalancing day is among the busiest of the year from a volume standpoint. Last year, 12.8 billion shares changed hands on U.S. exchanges on rebalancing day. This year, the addition of Berkshire Hathaway for the first time is expected to add to the day’s excitement.
Our Sector rankings this week look much the same as last week. Just two sectors are poking their heads into positive territory, and Utilities have now grabbed the top spot away from Telecommunications. Utilities have come under pressure the past few days, so we would not be surprised to see the sector slip before our next update. Consumer Discretionary took the biggest hit as investors started to ponder the ramifications of a double-dip recession on consumer spending. Financials turned in the best “relative” performance of the week by falling less than all the other sectors, although it wasn’t enough to move it out of last place. The Deepwater Horizon disaster in the Gulf of Mexico has resulted in a large increase in volatility for the Energy sector, a state we don’t expect to change anytime soon.
The Style rankings are in barbell mode – perhaps inverse barbell mode depending on your viewpoint. Viewed horizontally, both ends of the capitalization scale are weighing down both ends of the barbell. Mega Caps and Micro Caps, the two extremes, are sharing the dubious honor of last place rankings. The vast middle ground of the rankings is covered by the Large Caps and Small Caps. Mid Caps are the center of the capitalization barbell, and they are at the top of the rankings, signifying superior relative strength. Growth is ahead of Value at all capitalization levels but not by enough margin to make a difference at this point.
China and Canada continue to hold the top spots in the Global rankings. The move by China to float the Yuan is viewed by many as showing confidence in their ability to sustain a high level of internal growth even though there was likely some political pressure involved. Emerging Markets edged slightly into a positive trend this week, although “neutral trend” might be a better description. The U.S. dollar has been relatively stable this past week, despite the Yuan/Dollar exchange rate news, so currency translations have not been a big factor on our rankings. The European Union and United Kingdom continue to occupy the bottom slots.
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.
“Financial conditions have become less supportive of economic growth.”
From FOMC Statement Released June 23, 2010
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