QE2 Reaches Port
QE2, having been on the horizon for several weeks now, finally reached dock today. The Federal Reserve announced plans to buy $75 billion a month in Treasury securities between now and next June, totaling $600 billion. Together with other programs, the Fed will now be injecting $110 billion of previously non-existent money into the economy every month. In the olden days this was called “monetizing the debt.” These days the politically-correct term is “Quantitative Easing.”
Will QE2 be more effective than QE1? The answer depends mainly on how you define “effective.” If the goal is to combat deflation by creating inflation, then it may be effective. If the goal is to restore the economy to health by putting unemployed people back on the job, then it probably won’t have much impact. If the goal is to make the Federal Reserve look like it is “doing something,” then it will definitely work. We still maintain that the only real solution is time.
Something else happened this week… what was it… oh yes, Election Day. An angry populace imposed divided government on Washington. Republican control of the House and Democratic control of the Senate and presidency could cause gridlock for the next two years. We think this may actually be an improvement, but time will tell. Public policy may become somewhat more business-friendly and taxes on individuals may hold steady instead of go up. Both of these would seem to be positive for stocks.
Yields on long-term Treasury bonds rose sharply after the Fed announcement. The thirty-year bonds ended the day at 4.06%. The reaction at the ten-year level was more muted, with rates rising only slightly to 2.62%. The Fed’s purchases will probably focus on the shorter end of the curve; the result should be a steeper yield curve in coming months. Not coincidentally, this will be beneficial to banks and other lenders. The Fed is still keenly aware that many banks are in precarious positions. Gold had a crazy day as Fed news and speculation swirled through the markets, but it ended down from the prior close. The U.S. Dollar touched a nine-month low against the Euro.
The Sector rankings look just like they did seven days ago, relatively speaking, though the readings mostly edged lower. Only Technology managed to pick up any momentum over last week. Materials may soon lose its grip on the top spot. The tech uptrend has been smoother than others, and now the semiconductor industry – a previously lagging subsector – has joined the party. Consumer Discretionary is still strong, and Financials are still on the bottom along with the normal defensive sectors.
Style rankings changed a little more than sector rankings did, but not by much. Small Cap Value fell three places in the chart but lost only five points in momentum. With the field clustered in such a tight range, even a small change in momentum can create large moves in relative rankings. Overall, Growth still has an advantage over Value. Large Cap Value and Small Cap Growth are at opposite extremes in the momentum race, just as they are in the Style box.
Latin America recaptured the top spot in the Global rankings, moving up from fourth place. Brazil, Mexico, Chile, and Colombia all had strong weeks. China dropped from second to fifth after an October 27th downdraft. The cause seems to have been action by the central bank to change its foreign exchange reference point, and China stocks have since recovered partially. Europe relinquished its top spot but remains strong at #2. Japan weakened further the last few days and is now starting to separate itself from the pack to the downside.
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 have an unhealthy focus on the Fed. “
Vincent Reinhart, former Fed monetary-affairs director
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