Resolved is not the appropriate word, as it could lead you to the wrong conclusion. Instead, the debt crisis was merely postponed. Yes, Congress did strike a deal last week, but it was an agreement to buy more time. They reopened and funded the government through January 15 and gave the U.S. Treasury authority to borrow more money, with February 7 now being the estimate for reaching the new debt ceiling. The major accomplishment was pushing the October deadlines into 2014.
Fallout from the partial government shutdown included the Bureau of Labor Statistics (“BLS”) not releasing its September employment report on October 4 as scheduled. The BLS did get around to releasing it yesterday, and the report seemed to contain more of the same. Employers added just 148,000 jobs in September, well below expectations of 180,000, well below the average for the first half of the year, and one of the lowest figures in 2013. July has been the weakest month of employment growth this year, and the BLS revised those figures even lower to just 89,000 new jobs. The average for the third quarter was 129,000 new jobs per month, a hefty 35% decrease from the first-half average.
Despite the miserable number of new jobs, the official unemployment rate dropped to 7.2%. The reason for this is in the equation’s denominator, where another 136,000 people left the labor force in September, putting the workforce participation rate at a 35-year low. The September report does not reflect the partial government shutdown, which places additional importance on the October report, scheduled for release on November 8. Any blip from the 800,000 furloughed government workers should be transitory, as they will be receiving back pay. However, the domino effects into the private sector are still cause for concern.
Meanwhile, talk of the Fed tapering its bond purchases anytime soon has all but gone away. Given the recent economic weakness, the government shutdown, and the unreliable and volatile data expected over the next month or two, the Fed will probably not have enough improving economic data points to hang its hat on. At least one analyst is forecasting the Fed’s next move will be to increase, instead of decrease, the current $85 billion per month in bond purchases.
It was a week where every market segment became stronger. Industrials and Materials remain #1 and #2, although the gap between them disappeared. Telecom was the big mover, jumping from eighth to third, which was quite a feat when everything was in rally mode. The rise in Telecom pushed Consumer Discretionary and Technology each down a notch. It also forced Energy, Health Care, and Financials to move one rung down the ladder. It is hard to think of these three as below-average performers when their momentum scores are in the high twenties. Real Estate continued its climb out of the basement, moving up another spot and pushing Consumer Staples lower. The Utilities sector brings up the rear for the second week.
There is little change in the relative order this week as market strength continues to have an inverse capitalization hue. Style categories tend to have more diversification than Sectors, which leads to fewer extremes in their momentum scores. We do not have the hard statistics at hand, but our anecdotal memory-bank only recalls a few times a year where the high or low Style momentum scores are outside the bounds established by the Sector categories. Today is such a case with Micro Cap, Small Cap Growth, and Small Cap Blend all exhibiting stronger trends than the highest ranked Sector categories. In other words, the market is currently making more of a distinction about the size of a company than its industry group. One way to take advantage of this characteristic in your Sector investing is to use either small cap or equal weight Sector fund families. Both will help reduce your weightings of Large Cap stocks by placing more emphasis on Mid Caps and Small Caps.
International markets are participating in the current rally, too. However, not all were able to show improvement the past week, and China took a significant plunge in relative strength. Europe remains the top-performing region and is now getting help from a strengthening euro. Pacific ex-Japan climbed two notches to second place. The Sector rankings provide a clue to the recent success of Pacific ex-Japan, as the strong Materials group has significant weighting in this region. EAFE climbed three places on strength in developed markets. Emerging Markets dropped two spots on weakness in China while Latin America held its ground. The U.K. and the U.S. moved in tandem and improved their rankings by two positions. The U.S. relative improvement was impressive given the weakness in the U.S. dollar. Japan could not keep pace and slipped a spot while Canada improved one position. China plunged from third to last place, and China ETFs were down about 3% in trading today. Banks there are writing off more debt than expected, and short-term interest rates spiked. The negative action spilled over to Japan and other Asian markets.
“Thanks to some overly enthusiastic economic projections that look more and more out of line with reality and a dysfunctional Congress that caused a very partial short-term government shutdown, the Federal Reserve appears likely to allow the current pace of quantitative easing to continue unabated. When we add it up, the tapering phase of QE is unlikely to start until the first few months of 2014 at the earliest.”
Scott Wren, senior equity strategist at Wells Fargo Advisors
October 22, 2013
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