07/31/13   It’s The Economy…

Editor’s Corner

Ron Rowland

The economy is doing better.  You don’t have to take my word for it.  The Commerce Department issued its first take on second quarter GDP today, and the report showed an economy growing at a 1.7% annual rate.  Granted, 1.7% is nothing to brag about, especially when investors are worried that China’s GDP just slowed to 7.5%.  However, the reported 1.7% was much better than the consensus estimate of 0.9% and well ahead of the revised 1.1% rate for the first quarter.

GDP calculation methodology just underwent a “comprehensive overhaul,” with today’s report being the first issued under the new regime.  The overhaul changed all the historical data going back to 1929, proving that it is possible to rewrite history.  The government revised the data using improved measures for defined-benefit pensions and included intellectual property and intangible assets such as research, development, entertainment, and the arts.  You will likely hear more about this revised method of calculating GDP in the weeks and months ahead.

Today’s ADP report on private-sector jobs showed an increase of 200,000 jobs in July.  Details indicate service related jobs took a big jump while manufacturing declined.  This was better than economists expected, although their real focus is on the government-issued employment reports due out on Friday.

A two-day FOMC meeting concluded today with the Federal Reserve making no changes to monetary policy.  The bond-buying program will remain in place at the current rate of $85 billion per month.  The Fed said the economy grew at a modest pace during the first half of the year and mentioned that mortgage rates have risen somewhat and inflation is running below the Fed’s longer-run objective.

Fed watchers like to parse the official statement for changes and jumped on the description of economic growth being “modest” as opposed to “moderate.”  The formal policy statement has not described economic growth as “modest” in more than three years.  Therefore, analysts view this one-word change as a downgrade in the Fed’s outlook.  Accommodation will remain in place because the economy is not growing the way the Fed would like it to.

Investor Heat Map: 7/31/13


This week, we once again have minor shuffling among the leaders that falls short of being a rotation.  The top five sectors from a week ago are in the top five today, and they continue to separate themselves from the others.  Health Care moved from third to first as the pharmaceutical industry is now helping biotechnology pull the entire sector higher.  Consumer Discretionary holds on to its second place position despite weakness in the homebuilders.  Financials fell from first to third, but strength in regional banks is trying to pull the sector back up.  Telecom and Industrials tied for fourth place a week ago and repeated that feat again today.  There appears to more movement in the lower tier of the rankings led by Technology’s huge jump out of last place.  Technology was easily the best performer of the week, sparked by resurgence in Apple (AAPL) and Facebook (FB) shares.  Real Estate took a nasty spill to last place, and it is showing further weakness to today.  Unless it stages a dramatic reversal, Real Estate will likely be registering a negative trend by our next update.


Micro Cap and the three Small Cap categories continue to lead the Style parade.  They haven’t seen a serious challenger in weeks (perhaps months), as the other categories seem to be content with the pace of their upward trends.  That is a key point – the Mid Cap and Large Cap groups may be lagging from a relative strength perspective, but they are doing just fine when it comes to absolute strength.  These so-called laggards continue to have Large Cap Value at the front of the group.  The job of occupying the bottom has been rotating between Large Cap Growth and Mega Cap.  Today, that honor falls to Mega Cap.


If you are looking for rotation, then you can find it in the Global rankings.  Europe surged from sixth place to first this week.  Even more surprising is that Germany had nothing to do with it.  Instead, most of the strength came from Spain, Greece, Ireland, Italy, and Portugal.  The co-called “PIIGS” nations that many investors thought would be the demise of Europe.  The U.S., World Equity, and the U.K. own the next three spots, just as they did a week ago.  Canada moved up a couple of steps to fifth and EAFE slid to sixth.  Japan was a big mover, plunging from first to sixth and now sits on the verge of a new negative trend.  The bottom four categories are still the same ones and all remain negative.  Latin America’s attempted rebound was short-lived and easily reversed.


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.


“[It’s] the economy, stupid.”

James Carville, as campaign strategist for
Bill Clinton’s successful 1992 presidential campaign


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