Dollar in the Dumps
It’s now official: the recession is over. We know this because Fed chairman Ben Bernanke said so this week, though the full quote is not exactly brimming with optimism. “Even though from a technical perspective the recession is very likely over at this point, it is still going to feel like a very weak economy for some time as many people still find their job security and their employment status is not what they wish it was,” Bernanke said. We must say this off-the-cuff remark is impressive for containing at least six disclaimers: 1) “From a technical perspective…” 2) “very likely…” 3) “to feel like…” 4) “for some time…” 5) “many people…” 6) “not what they wish it was…”
Even an unhedged statement would have been suspect, of course. Bernanke did not see the recession coming, so why should we give any credence to his declaration, however vague, that it may now be over? This is, after all, the same Fed chairman who said this back in May 2007: “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” That sentence also includes abundant disclaimers, so we can’t really say Bernanke was wrong. The point is that he, like his predecessor Alan Greenspan, makes these sort of statements in an effort to inspire confidence. He may or may not be right.
Those who want to believe the economy is on the mend took comfort in the latest data. The Consumer Price Index came in hotter than expected, rising 0.4% from July to August. The one-year change was still deflationary at -1.5%. Industrial production and utility output also posted unexpected gains. Conventional wisdom is that rising price levels mean a pickup in economic activity, but we aren’t so sure. Much of the August CPI gain came from higher fuel prices. Food prices were also slightly higher, and excluding these two items the change was right in line with the forecasts. With unemployment and underemployment still rampant, a rise in the cost of living is not good news for many people.
If Bernanke’s goal was to push the stock market higher, he succeeded. The S&P 500 climbed to a new 2009 peak today and has stayed above the magical 1,000 mark for eight consecutive trading days. Short-term volatility is dropping quickly. The CBOE Volatility Index (VIX) is in a strong downtrend, indicating pessimism is on the wane among options traders. Obviously the economic fundamentals are irrelevant to whoever is buying stocks right now. They may be right for the time being, but we still question the sustainability of the bullish equity trends.
Treasury yields moved higher in the last week, with the ten-year up from its September 11 low of 3.27% to close today at 3.47%. Surprisingly, this is the same level it was at a year ago. Long-term interest rate trends are higher but not wildly so, given the massive new supply that has hit the markets this year. Meanwhile, the dollar is dropping hard against other currencies – which may have something to do with higher stock prices in the U.S. We have noticed that companies with heavy international exposure such as General Electric (GE) are performing particularly well. Whether the bullish bets will pay off in the long run is the bigger question. We’re still cautious.
The Materials sector had a huge advance this past week as downward pressure on commodity prices seemed to subside. Materials is still on top of our chart, and Industrials (anchored by the aforementioned General Electric) moved up to #2. The economically defensive sectors, namely Health Care, Consumer Staples and Utilities, all slid down the rankings and now occupy three of the bottom four positions.
All the Style categories advanced as momentum sparked even more momentum. In other words, the strong got stronger. Mid Cap Value stayed in first place, and Mega Cap stayed on the bottom. While the relative rankings were mostly unchanged, the spread between strongest and weakest increased from 20 to 36 this week.
The E.U. took over the top of our global rankings, barely edging out Pacific Ex-Japan. Strong gains in European stock markets combined with strength in the euro helped push the E.U. benchmarks higher. iShares MSCI Australia (EWA) opened with a strong surge this morning, which suggests Pacific Ex-Japan may regain some momentum by next week. Latin America and Canada improved on strong performance in their Materials sectors. Japan is still on the bottom of the chart and barely picked up any momentum at all.
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.
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