07/15/15   Yellen Goes To Congress

Editor’s Corner

Ron Rowland

It is not officially called the Humphrey-Hawkins testimony anymore, but that is what is taking place in Washington, D.C. today and tomorrow. Twice a year, the Federal Reserve Chairman is required to provide oral testimony on its Monetary Policy Report to special committees from both chambers of Congress. Today, Janet Yellen is addressing the Financial Services Committee of the House of Representatives. Tomorrow she appears before the Senate Banking Committee. In addition to looking for clues as to when interest rates will start to rise, Fed watchers will be looking for any changes in her responses over her two days in the hot seat.

Yellen believes the Fed is on a path to begin hiking interest rates this year and that the US economy will be ready for it. She went on to claim the first step could occur at any meeting. In case you are wondering, the next FOMC meeting concludes just two weeks from today on July 29. However, no one believes it will occur that soon. In fact, the consensus analysis puts a probability of a hike at 0% for July, 18% for September, and 32% for October. The December FOMC meeting is the first time the probability swings to 51%. Many believe that sometime in 2016 is the most likely scenario.

According to her prepared testimony, “If the economy evolves as we expect, economic conditions likely would make it appropriate at some point this year to raise the federal funds rate target, thereby beginning to normalize the stance of monetary policy. Indeed, most participants in June projected that an increase in the federal funds target range would likely become appropriate before year-end. But let me emphasize again that these are projections based on the anticipated path of the economy, not statements of intent to raise rates at any particular time.”

As you might expect, the Fed’s concerns include Greece and China. Both countries are facing economic uncertainty with the potential to dampen global growth, and in turn, weigh on the US economy. The IMF has already cut its growth forecast for the US, and is now calling the latest Greece relief package into question. Greek debt continues to grow with each new deal and the IMF believes the country’s budget targets are not realistic. This new stance has some analysts concerned that the IMF may not take part in the latest round of bailout funding.

Investor Heat Map: 7/08/15


Health Care is on top again this week, providing the upside leadership to the four sectors in the green. Biotechnology has been receiving a large amount of investor attention, but pharmaceutical stocks have also been driving the Health Care sector higher. Consumer Discretionary has kept its grip on second place for a fourth week, and it has not ranked lower than fifth for 25 straight weeks. There was a shift toward a defensive stance in last week’s rankings that is now starting to diverge. One of the defensive sectors, Consumer Staples, climbed a notch to third while another, Utilities, slipped two spots lower. Financials gained momentum but fell from third to fourth. Technology and Real Estate both climbed two positions higher to move ahead of Utilities. Telecom fell two spots, following Utilities lower in the rankings. Industrials, Materials, and Energy continue to lag. Energy is encountering renewed weakness on the prospects of Iranian oil exports resuming.


The stock market gains of the past week increased the quantity of style categories in the green from three to seven. Small-Cap Growth extended its lead over the others, while Micro-Cap and Small-Cap Blend continue to hold down the second and third spots. Large-Cap Growth led the group of four categories moving from red to green, and it is close on the tail of Small-Cap Blend. Mega-Cap moved ahead of Large-Cap Blend, and they are the only two style categories changing their relative positions this week. Mid-Cap Growth was the last of the four categories shedding its red hue this week, which places all three Growth categories in uptrends. Small-Cap Value is on the negative side of zero, followed by Large-Cap Value, Mid-Cap Blend, and Mid-Cap Value. This marks Mid-Cap Value’s sixth week of being on the bottom.


As predicted last week, downside volatility in Japan’s stock market caused Japan to give up the top-ranked spot it held for four weeks. The US ascended from second to first, and it now occupies the position it vacated 32 weeks ago. The European Monetary Union zoomed from sixth to second and reversed its steep downtrend on optimism that a new deal for Greece has been reached. The Global X FTSE Greece 20 ETF (GREK) is not displaying the same optimism however, and its momentum reading remains deeply negative at -65. Japan, as previously mentioned, relinquished its top-ranked spot and this week lands in third. EAFE, World Equity, and the UK all posted impressive gains for the week but fell short of moving from red to green. On an absolute basis, there is not much difference in the momentum scores of the top six global categories even though technically, half are in uptrends and half are in downtrends. However, the five categories below show significant differences with each successive one falling deeper in the red. Latin America heads up this list of laggards, while China brings up the rear.

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.


“In sum, since the February 2015 Monetary Policy Report, we have seen,
despite the soft patch in economic activity in the first quarter, that the labor market
has continued to show progress toward our objective of maximum employment.
Inflation has continued to run below our longer-run objective,
but we believe transitory factors have played a major role.”

Janet Yellen (July 15, 2015)


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