FOMC Meeting – with a Twist
News-worthy stories emanated from Athens to Washington today, as well as several points in between. The Greek drama’s latest scene involved a government agreement to accelerate budget cuts in exchange for another installment of European bailout money. The main beneficiaries of this action are actually German and French bankers, who can now postpone the write-off of their unwise loans to Greece for a little while longer. Greeks who will bear the cost are none too pleased. Another wave of protests and strikes will unfold shortly.
Also today, the U.S. Federal Reserve’s Open Market Committee confirmed the widely-leaked “Operation Twist” plan to extend the maturity of its Treasury portfolio. The goal is to put downward pressure on long-term interest rates without expanding the Fed balance sheet. It may actually work, but long-term interest rates are already extremely low. Exactly how this is supposed to help the economy is unclear; mortgage rates have recently moved to historic lows, and near-zero interest rates at the short end of the scale haven’t made much difference. Like budget cuts in Greece, interest rate cuts in the U.S. serve only to help bankers buy more time.
The Fed said it expects inflation to stabilize in the next few quarters. They had better be right; core inflation, even excluding food and energy prices, is at the upper end of the Fed’s preferred range. Their best hope for avoiding inflation is to keep the economy in its present near-recessionary state. In that regard, a spike in initial jobless claims last week to 428,000 was actually good news for the Fed. It gave them maneuvering room to be accommodative without looking recklessly dovish.
Equity benchmarks found little solace in either Europe or the U.S. Last week’s mild recovery looks more and more like a bear-market bounce driven by short-term traders. Consumers everywhere are pessimistic, and businesses are reaching the limits of cost-cutting and productivity growth. Real people in the real economy (i.e., outside Washington and Manhattan), see no reason to celebrate.
The bias toward defensive sectors is a little more apparent on this week’s chart. Utilities and Consumer Staples remained in first and second place, respectively, and are the only two equity categories with positive intermediate-term momentum. Technology continued to gain relative strength and is now in third place. Health Care – often considered defensive – fell behind Consumer Discretionary, perhaps due to talk about cuts in government Medicare/Medicaid spending. Momentum drops off sharply after the top five sectors: Telecom, Materials, Industrials, and Energy are all trending downward at double-digit annualized rates. The Financials sector is worst of all with a momentum score of -46. While that is an improvement from last week’s -60, the banking sector still looks firmly bearish.
A picture may be worth a thousand words, but a quick glance at this week’s Style graphic could be worth millions of dollars. The relative order of the categories was unchanged from our last report. However the difference between “best” (Large Cap Growth) and worst (Small Cap Value and Micro Cap) increased sharply. The historically large spread (41 RSM points) will no doubt narrow at some point, but it could also widen first. If one must be in stocks, Large Cap Growth is still the least-bad choice.
The U.S. and Japan remain on top of a very weak global lineup. Both were beneficiaries of currency strength amid a continued flight out of the Euro, Pound, and Swiss Franc. The U.K. did manage to edge ahead of Canada to grab third place. Recent strength in Pacific ex-Japan was absent this week as Australia, Hong Kong, and Singapore all failed to participate in the global equity bounce. Emerging Markets, including China and Latin America, were also left out. Europe did participate in the bounce; in fact, Europe led the bounce. But a bounce is not the beginning of a new uptrend, and Europe stayed on the bottom of the list.
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.
“Well, shake it up, baby, now, (shake it up, baby)
Twist and shout (twist and shout).”
Written by Phil Medley and Bert Russell
Performed in the 1960’s by Top Notes, Isley Brothers, and The Beatles
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