Kabuki has been a time-honored theatrical art form in Japan for hundreds of years. It is also a word used to describe an American political art form, namely that of political posturing. One definition claims it describes an event designed to create the appearance of conflict or of uncertain outcome, when in fact the outcome is known in advance. Such is the case for the health care hearings underway in our nation’s capital.
Why they are called “hearings” is anyone’s guess. The events are positioned as criminal trials intended to “get to the bottom” of an issue, and witnesses must swear an oath to tell the truth. However, there are typically few, if any, real questions ever asked. Instead, it is a series of speeches by the congressional panel aimed at appealing to their constituents. When politicians occasionally ask a real question, they don’t really want to hear the answer. Unfortunately, political kabuki is neither pretty nor entertaining. We would like to apologize to our Japanese friends for this unfortunate transformation of meaning.
With health care taking center stage in Washington, investors need to keep an eye on their health care related investments. The overall sector is quite large, estimated to encompass $2.2 trillion in market capitalization, generate $1.7 trillion in annual revenue, contain more than 700,000 companies, and employ nearly 17 million people. These figures are for just the U.S., not the entire world. It is big business, and nearly all of it will be affected by the implementation of the Affordable Care Act.
There are many industries comprising the health care sector including drug makers, insurers, hospitals, equipment manufacturing, biotechnology, and service providers to name a few. This week we are learning the sector also employs thousands of programmers and software specialists, careers we may not automatically associate with health care.
With many items still in flux, it is too early to determine the winners and losers on an industry basis. So far, they all seem to be ignoring the headlines. Uncertainty is typically a negative catalyst for stocks, but health care stocks are shrugging it off for now. We believe this apparent complacency will not last forever. It is time to keep a watchful eye on your health care holdings.
The Fed concluded a two-day FOMC meeting today. There is a good chance you didn’t even know one was scheduled this week. That’s because given the political turmoil of the last month, and the chastising the Fed took after its “surprising” decision to delay tapering at its last meeting, everyone was convinced that nothing would come out of today’s gathering. The Fed did not disappoint anyone today and maintained the status quo. It will continue to make $85 billion of bond purchases monthly.
Market momentum remains quite strong and increased for most Sector categories this week. Industrials stocks sit on top again, powered by gains in transportation, defense, and aerospace firms. Telecom climbed another rung and now sits in second place. Consumer Discretionary also improved its ranking as retailers and homebuilders advanced. Despite excellent gains in gold miners and water companies, Materials slid two spots to make room for the advancement of Telecom and Consumer Discretionary. Technology is treading water in fifth place, while Health Care advanced to sixth. Consumer Staples was the big winner for the week, posting the largest momentum gains and increasing its ranking by three places. There was some shifting among the bottom tier categories, although nothing of significance. The Utilities group occupies the bottom slot for the third consecutive week.
Last week there were three Style categories displaying higher momentum scores than the top-ranked Sector, and we commented on its rarity. Such occurrences are typically fleeting as demonstrated in this week’s rankings where that irregularity is now gone. The order of the seven highest ranked categories is unchanged from a week ago, although the scores are slightly more compressed. Strength remains closely aligned with an inverse capitalization structure. Micro Cap sits on top, followed by the three Small Cap segments. In the lower tier, Large Cap Blend and Mid Cap swapped places as did Mega Cap and Large Cap Value.
Most Sectors improved momentum over the past week, and Styles had mixed results. However, Global categories mostly lost strength. Europe holds on to its top ranking, although it appears to be in a sideways consolidation. EAFE climbed one spot to second, and the U.K. jumped from seventh to fourth. The apparent success of the U.K. is more attributable to weakness in other regions as opposed to internal strength. Pacific ex-Japan relinquished its second place ranking after just a week. Recent moves have shown high correlation to the Australian dollar, which lost ground to other currencies this week. The U.S. continued to improve its world standing, climbing two spots to sixth. Developing market categories fell hard. Latin America dropped two spots to seventh, and Emerging Markets plunged from fourth to eighth. China took the biggest hit, but since it was already in last place, it couldn’t fall any further. It did lose all its momentum though, and China is now in danger of flipping into a negative trend.
“It’s just a Kabuki dance. They’re sort of like two dogs that meet each other over a piece of meat. They’re sniffing each other out. They are moving toward a deal. That’s what’s going on.”
Former President Bill Clinton on Congressional Fiscal Cliff Negotiations in December 2012
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