09/19/12   Global Easing / Global Stimulus

Editor’s Corner

Ron Rowland

Central bank stimulus, easing, accommodation, or whatever you want to call it, is spreading around the globe.  Two weeks ago, the European Central Bank announced its intent to embark on a bond buying program.  China threw in a $157 billion infrastructure spending program about that time, too.  Last week, the U.S. Federal Reserve laid out its plans for QE3.  Overnight, the Bank of Japan boosted its asset purchase plan by 10 trillion yen, the equivalent of about $125 billion.  Stimulus has now been applied around the globe.

Back here at home, the unveiling of the Fed’s highly anticipated next round of quantitative easing was met with general approval. The heart of the new program entails the Fed buying $40 billion per month of mortgage-backed securities.  Making a commitment that was out of character, the Fed said it would keep buying until the job market improves.  In other words, QE3 has no expiration date.  “We want to see more jobs.  We want to see lower unemployment.  We want to see a stronger economy…” Chairman Bernanke was quoted as saying.

You may recall that as part of his Jackson Hole speech last month, Mr. Bernanke indicated concerns about the potential for long-term structural damage that persistently high unemployment rates can cause.  The U.S. unemployment situation now has the full attention of the Fed.

Much of the post-FOMC market action was predictable, at least in the short term.  Stock prices rallied sharply, and inflation-sensitive assets reflected increased probability of long-term inflationary pressures.  Gold, commodities, and inflation-protected bonds pushed higher.  The initial reaction in the Treasury market was a selloff, as it is likely to suffer in an inflationary environment.

Short-term reactions do not always translate into identical long-term reactions.  Crude oil prices rose after the FOMC meeting, trading briefly above $100.  Then, a wave of profit taking drove the price of oil sharply lower on Monday, and a bearish inventory report is sending it down again today.  A nearly 9% correction in the span of a few days should be enough to shake out the weak hands, although this could be the early days of a new crude oil bear market.  Time will tell.

Investor Heat Map: 9/19/12


For the second week in a row, the sector rankings have little resemblance to the lineup of the previous week.  Energy is the new top dog, wrestling the bone away from Consumer Discretionary, which managed to occupy that position for only one week.  Energy has been climbing right along with increasing crude oil prices.  So far, the declines in the oil market are only causing a mild retreat in Energy equities.  Financials continued to climb the rankings, this week landing in the #2 spot thanks to an accommodative Fed.  Materials is also benefitting from the QE3 announcement, moving up to third place as investors become increasingly nervous about the long-term inflationary aspects of quantitative easing.

Consumer Discretionary fell from first place to fourth, although there is nothing to be alarmed about as its momentum reading actually improved.  Technology improved a notch to fifth place, effectively halting its two-week slide from the top spot.  Telecom tumbled in the relative rankings, but much like Consumer Discretionary, it gained absolute strength in the process.  Don’t count Telecom out yet.  The defensive trio of Health Care, Consumer Staples, and Utilities again share the bottom along with Industrials.  Utilities was the only sector to lose strength this week, falling back into a negative trend and securing its last place position.


The Small Caps are on a mission to conquer the Style rankings.  A week ago, their intent was made clear when the Small Cap categories took control of the top three slots.  Missing from that top-tier lineup was the Micro Cap category, the smallest of the small.  That anomaly has now been rectified, and the four smallest capitalization categories reside in the four highest ranked positions.  We also noted last week there was a virtual 3-way tie among those Small Cap designations, but today Small Cap Value has a definitive edge.  In fact, Value has a clear advantage over Growth at all capitalization sizes.  For Small Caps, Value is ranked first while Growth is fourth.  Among the Large Cap categories, Value ranks sixth while Growth is tenth.  The Value over Growth distinction is most obvious in the Mid Caps, where Value ranks fifth while Mid Cap Growth is all the way at the bottom in eleventh place.


Europe continues its tight grip on the top-ranked Global category and best performing equity category overall.  Its momentum readings are aided by the fact that the region was floundering at three-year lows a few months ago, making intermediate-term comparison easier.  European ETFs were turned back a few days ago as they approached their March peaks.  That resistance could prove to be formidable in the short term.  Canada hung on to its second place spot, while EAFE moved up one position to third by exchanging places with World Equity.  The U.K. leads the next four tightly packed categories, with Pacific ex-Japan, the U.S., and Emerging Markets close behind.  Emerging Markets is a newcomer to this group, transitioning up and out of the laggards, where it languished for many months.

Latin America is also trying to separate itself from the laggards, but so far it has not been successful in accomplishing that task.  Like most places around the globe, Latin America received a nice boost last Thursday and Friday after the conclusion of the FOMC meeting, and it has been drifting sideways since then.  Overnight action by the Bank of Japan has not translated into higher Japanese equity prices for U.S.-based investors yet.  China is still at the bottom of the stack, although both it and Japan managed to flip from negative to positive trends this week.



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.


“If you are trying to get a car moving that is stuck in the mud, you don’t stop pushing the moment the wheels start turning.  You keep pushing until the car is rolling and clearly free.”

New York Fed President William Dudley on why the Fed won’t start tightening policy when the economy starts to improve.  September 18, 2012


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