After weeks of shrugging-off the political ranker taking place in Washington D.C., markets have now begun to register their distaste surrounding the uncertainty. Many stock market segments established new highs just last week as the calendar rolled over to October. All that changed this past weekend as a lack of progress became evident and the partial government shutdown prepared to enter its second week. The retreat has been sharp and swift. Leading industry groups, like biotechnology and internet stocks, dropped more than 5% the past few days.
Today, the Federal Reserve released the minutes from its September FOMC meeting. As you probably recall, that is the meeting where the Fed caught nearly everyone off-guard by not cutting back its bond purchases. The minutes reveal it was not an easy decision to agree on. Economic data had been sluggish and supported continuing the $85 billion in monthly purchases. However, a contingent of governors was concerned that doing nothing would hurt the Fed’s credibility, given that it had telegraphed its intent to begin tapering. The looming government debt ceiling also played a role.
President Obama nominated Janet Yellen as the next Fed Chair today. Analysts made her the front-runner as soon as Lawrence Summers removed himself from consideration last month, and today President Obama made it official. She still has to acquire Senate confirmation, but expectations are that she will encounter no major roadblocks. The president also used the opportunity to praise Ben Bernanke for his service and his calm and steady hand during the worst financial crisis of our lifetime.
The International Monetary Fund (“IMF”) is making news this week as its annual meeting gets underway. The group of world financial experts is concerned about the political gridlock in this year’s host city of Washington and the resulting impact on the world economy. The IMF said it has again reduced its world growth forecast, making it the sixth consecutive negative revision. The new forecast is for 2.9% growth this year, down 0.3% from its July forecast. Additionally, it cut next year’s growth outlook by 0.2% to 3.6%.
All Sectors lost momentum over the past week, and four are now in the red with negative readings. Consumer Discretionary maintains its top position, although its margin over Industrials evaporated. Materials moved up a notch and is poised to overtake Industrials. Technology slid to fourth, putting it in a tie with Health Care. Energy and Telecom turned in above-average performances, which was good enough to post positive momentum readings but not enough to improve their relative rankings. Financials and Consumer Staples both flipped over to negative momentum this week, joining Utilities and Real Estate. Consumer Staples and Utilities are defensive categories that tend to outperform during weak market conditions. That was true this past week, although the new environment hasn’t been in place long enough to improve their rankings.
There was not much change in the relative Style rankings this week. The top four and bottom four categories didn’t change their positions, and there was only slight movement among the middle three. However, momentum was squeezed across the board, and the strongest categories took the biggest hits. Small Cap Growth held its top ranking, although its momentum score was cut in half. Micro Cap is a similar story and held on to its second place ranking. As is often the case during market pullbacks, the groups previously providing the leadership are the ones that suffer the most. Sometimes this is only temporary, setting up those groups to be repeat leaders during the next up-leg. Other times it signals a leadership change. It’s too early to tell if this pullback will produce a change in leadership, but it is certainly something we will be monitoring.
Europe maintains its place at the top of the Global rankings and held up remarkably well this past week. Most of its detectable weakness was the result of the U.S. dollar gaining against the euro. Last week we noted that China appeared to be preparing for another upside push, and it delivered by jumping two spots to second place. Emerging Markets was the only equity category not losing any momentum this week, allowing it to surge five positions to third. Improvements for China and Emerging Markets pushed both Pacific ex-Japan and EAFE lower. Latin America also benefited from relative strength in developing regions and climbed three places to fifth. Japan was the big loser for the week, dropping six positions to land in last place. Much of Japan’s weakness occurred in Monday’s trading after the U.S. government shutdown failed to make any progress over the weekend. Japan’s drop, along with Latin America’s rise, ended the previous condition of having all three Western Hemisphere categories sitting at the bottom. Additionally, Canada moved ahead of the U.S. in its climb out of last place.
“All members but one judged that it would be appropriate for the Committee to await more evidence that progress would be sustained before adjusting the pace of asset purchases. But with financial markets appearing to expect a reduction in purchases at this meeting, concerns were raised about the effectiveness of FOMC communications if the Committee did not take that step.”
FOMC minutes from meeting held September 18, 2013
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