A You Can Kick Around Ben For a Few More years
We will apparently have Ben Bernanke to kick around for a few more years, but the Fed chairman may regret not leaving the job when he had a chance. There is a sort of poetic justice in Bernanke’s re-nomination: He will now be forced to deal with the consequences of his decisions. Perhaps he wants to preserve his honor rather than leave someone else to clean up the mess. We don’t know, and in the big picture it probably doesn’t matter. Any new chairman acceptable to both the president and to 51 senators would not be much of a change.
Every time we begin to think the stock market is losing momentum, we get another upside surge to prove us wrong. The ongoing rally has been marked by pullbacks lasting only a few days, and this week the benchmarks again touched new peaks for the year. Volatility remains historically high. Compared to the extremes of late 2008 and early 2009, however, recent markets are the height of stability. Volume trends remained problematic for bulls as a handful of low-priced zombie financial stocks accounted for a big chunk of activity within the major indexes.
Signs of improvement in consumer confidence and housing prices are bolstering the case for economic recovery. New home sales in July posted their biggest jump since 2005, easily beating expectations. Inventories are dropping, too, though it is unclear at this point how many homes are being held off the market due to low prices. Meanwhile, the Mortgage Bankers Association reported that delinquencies rose in the second quarter to a record 9.24%. The increase was similar for both prime and subprime loans, indicating that unemployment (and under-employment) is pushing more homeowners over the edge. Nearly one in three mortgaged properties are now “underwater” with the mortgage balance exceeding the current value. The housing market may be stabilizing for now, but any “recovery” seems years away.
Bonds rallied this week, which might seem counterintuitive since both the Obama administration and the Congressional Budget Office predicted deficits will be far higher over the next ten years than previously thought. The explanation may be that bond traders were already well aware of the growing debt and the official reports served mainly as confirmation. The Treasury is still having little or no problem selling as much paper as it wants, with several more auctions going through without any hiccups and at historically low rates. Investors forget that in January 2000 the budget was in balance, markets were booming, and long-term T-bond yields were over 6%, compared to today’s closing rate of 3.44% on the ten-year notes. The reasons for this are complex and murky, but reality cannot be denied. So long as the federal government has the bond market all to itself, rates will likely stay low.
All sectors showed improvement this week though relative rankings were mostly unchanged. Energy moved ahead of Consumer Staples near the bottom of the list. Telecom is still in last place but regained positive momentum after going into the red the prior week. The Financials are still in the lead and managed to widen the gap with Materials. Health Care is in the middle of the pack but picked up steam, perhaps due to the growing discontent with reform proposals.
Style rankings were also steady except for a swap between Large Cap Blend and Small Cap Growth. Value is now ahead of Growth in all three capitalization segments. Generally speaking, Mid Caps are leading, Large Caps are lagging, and Small Caps are somewhere in between. One oddity is that Micro Caps are tied for the lead with Mid Value and Small Value; we have no ready explanation for this except to say that Micro Cap stocks are generally more volatile, and thus more likely to show short-term divergence.
Pacific ex-Japan (which is to say, Australia) managed to barely hold on to the top spot, but it is basically in a 3-way tie with the European Union and Latin America. The jump in relative strength by the EU was a surprise. Delving into country-by-country data, we find that most of the strength is coming from Austria, Sweden, Belgium, Spain, the Netherlands, and Italy. The larger economies of Germany and France contributed little. On the other side of the globe, China remained near the bottom of the chart as the so-called miracle economy consolidated recent gains. China remains strong on an absolute basis.
Note: We have changed our “World Equity” benchmark from iShares S&P Global 100 (IOO) to Vanguard Total World Stock (VT) beginning today. VT is not so dominated by global mega-cap stocks and is therefore a more representative index for our purposes.
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.
“A nickel ain’t worth a dime anymore.”
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