09/30/09   G-20 Enlarges the Discussion

Editor’s Corner

G-20 Enlarges the Discussion

Ron Rowland

Last week’s G-20 meeting in Pittsburgh received far more publicity than the preceding U.N. speechfest, probably because the G-20 group omits some of the world’s more colorful leaders, but the smaller group is much more important to the global economy. Did they do anything helpful? Not really. The main topic they discussed was how to enlarge the discussion. Economic coordination that was previously done in the more elite G-8 group will now be handled by the G-20, which adds China, India, Brazil and other emerging powers to the mix.

The other thing to come out of Pittsburgh was a consensus that banks should be more careful with everyone’s money. All well and good, but what does it mean in practice? No one knows yet. The implication is that banks should be required to hold more capital, but how much and where it will come from has yet to be determined. Agreement will not come easily; certain European banks are, if possible, in even worse shape than those headquartered in New York. Leaders of nations with weak banks will be under pressure to minimize any new regulations. The group also agreed to enhance the role of the International Monetary Fund, launching a wave of new conspiracy theories that don’t sound nearly as far-fetched as they would have a year or two ago.

Even if the G-20 were inclined toward less talk and more action, their ability to make a difference to the global economy is questionable at best. As noted above, they all remain subject to pressure from politically powerful bankers. Moreover, the economic forces unleashed in recent years will take time to run their course. Here in the U.S., the vexing and intertwined problems of unemployment and housing show no signs of improvement. Today’s ADP employment report showed more job losses than expected and is a bad omen for Friday’s official report. The Chicago Purchasing Manager’s Index fell in September, suggesting that recent gains in industrial activity are not sustainable. Available housing inventory is down, but reports suggest millions of homes are still being held off the market either by struggling workers or by former lenders who foreclosed and are now owners.

Why then, one might ask, did the S&P 500 just mark its second consecutive positive quarter? The answer is expectations. Having been proven frighteningly wrong in their previously bullish forecasts, analysts are overcompensating in the other direction now. Companies that lose money see their share prices rise when they turn out not to lose as much as Wall Street thought they would. This situation can last for longer than one might think. The number-crunchers are much less likely to be sanctioned for underestimating earnings than they are for overestimating. Nonetheless, the stock market’s bullish momentum is fragile and caution remains a good idea.

Bond yields fell slightly in the last week, with the ten-year Treasury rate holding above support in the 3.3% area. This helped the dollar stabilize a bit, though overall trends are still quite bearish for the greenback. Gold is still trying to punch through the old highs just above $1,000 and might just make it this time.


No sectors escaped the stock market pullback of the last week. The leading sector, Materials, was among the hardest hit but so far is still hanging on to the top spot in our relative strength rankings. Financials kept the #2 spot despite more ominous predictions for banks. The defensive trio of Health Care, Consumer Staples, and Utilities held up better than the growth sectors but still occupy the bottom three spots on the list.


Micro Caps moved to the top of the list while Mega Caps stayed on the bottom. The Russell index we use as a micro cap benchmark has a median market cap of just $134 million and constitutes less than 3% of the U.S. equity market, making it difficult and costly to actually invest in the group. ETFs and mutual funds are the best way for most investors to access the micro cap niche.

Pacific Ex-Japan regained the top spot as Australia’s materials sector outperformed similar stocks elsewhere. The re-election of Angela Merkel’s government in Germany provided a one-day boost for local markets, not unlike what happened after Japan’s recent elections. The boost proved temporary and Japan is still on the bottom of the rankings. China weakened further, though much of the country is fixated on the 60th anniversary party the communist government is throwing for itself.


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.

“We meet in the midst of a critical transition from crisis to recovery to turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy.”

G-20 Communique, September 2009


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