11/05/14   Japan Running Next Leg Of Stimulus Relay

Editor’s Corner

Ron Rowland

Monetary stimulus has fueled the markets for many years, so it was natural for investors to view the Federal Reserve’s end of quantitative easing with trepidation.  The Fed did an admirable job of telegraphing its intentions and avoiding any surprises.  As a result, investors took last week’s Fed statement that asset purchases would end in October in stride.  Markets showed little reaction, primarily due to the fact the Fed did what it said it would do.  There were no surprises, and investors had months to prepare.

Just as the U.S. was winding down its stimulus efforts, other nations were preparing to step up their games.  Japan was the first to come forward, and since its announcement was both huge and unexpected, there was significant market reaction.  With Prime Minister Shinzo Abe’s anti-deflation arrows loosing effectiveness, Japan’s central bank and its primary government pension plan unleashed bold, yet supposedly uncoordinated, new stimulus efforts.

Japan’s central bank announced plans to boost its quantitative easing efforts 33% above current levels.  The bank will begin buying stocks and real estate in addition to government debt securities.  Japan’s central bank already has a balance sheet equal to 57% of the country’s GDP, and the new round of buying will obviously push this figure higher.  In contrast, the U.S. Federal Reserve’s balance sheet is about 26% of GDP.

Meanwhile, the Japanese government’s pension fund will drastically alter its asset allocation by moving 30% of its portfolio into riskier assets.  The fund currently has 60% allocated to Japanese bonds that it intends to reduce to just 35%.  It will also eliminate the current 5% cash allocation.  The major beneficiary will be equities, with domestic stocks going from 12% to 25% of the portfolio and foreign stocks also jumping by 13% to 25%.  The remaining 4% of the portfolio undergoing redeployment will be targeted for foreign bonds with their allocation rising to 15%.  These moves sparked a huge rally in Japanese stocks that carried over to the rest of the world.

European economic activity is faltering, and the European Commission cut its growth forecast to just 0.8% next year and 1.1% for 2015.  Therefore, many of the region’s leaders would like to embark on their own quantitative easing efforts.  However, its status as a monetary union instead of a sovereign entity makes the pathway quite muddy.  The ECB is meeting today and tomorrow.  Bank chief Mario Draghi believes a large quantitative easing effort is needed, but other bankers from the region are prepared to oppose any action along those lines.

Investor Heat Map: 11/5/14


A week ago, Health Care was poised to retake the top of the rankings, and it accomplished that feat today.  Utilities wrestled the top spot away from Health Care four weeks ago and held it through the interim period.  It didn’t fall far and remains among the leaders.  Real Estate is now pursuing Utilities for second place.  Consumer Staples and Financials gained strength and held on to their fourth and fifth place positions.  Technology and Industrials swapped places with Technology coming out ahead and on the verge of pushing its way into the top five.  Telecom and Consumer Discretionary also exchanged positions.  Telecom now leads the two, and both increased their momentum scores to double digits.  Materials and Energy are the only two sectors still mired in negative trends.  Falling oil prices and other weak commodities continue to pressure these two producer categories but should be economically helpful for commodity consumers.


Not a single style category is in the same ranking position as a week ago.  A very tight spread across the momentum readings is the reason for this dramatic change, and only eight points separate the strongest category from the weakest for the second week in a row.  Although we can’t read too much into these changes yet, some trends are definitely emerging.  The rise of small company stocks is the most notable.  Small Cap Growth jumped from sixth to first, Small Cap Blend climbed from ninth to second, and Micro Cap leapt from last to fourth.  This places three of the four smallest capitalization categories among the four highest ranked style categories.  Small Cap Value still lags behind, although it managed to pull itself up four spots to sixth.  The former Large Cap grip on the top of the rankings started to fray two weeks ago and unraveled further last week.  Large Cap Growth fell from first to third, Mega Cap dropped from second to fifth, and Large Cap Blend slipped from third to seventh.  Large Cap Value was already the weakest of the big company categories, and it slipped three places lower to land on the bottom this week.  The Mid Caps were all pushed lower as a result of this shake up, and Large Cap Value is the only thing keeping them off the bottom.


Last week, the U.S. was the only global category in the green.  This week, it is joined by three other categories with positive momentum readings while keeping its first place ranking.  Japan was the big mover of the week.  The country’s latest stimulus announcements boosted equity prices, pushed it from fifth to second in the rankings, and flipped it to a positive trend.  China and World Equity were also successful in having the rally convert their trends to positive ones.  Pacific ex-Japan lagged for the week as its large weighting in commodity-related companies stifled gains and caused its ranking to slip two places to fifth.  Emerging Markets jumped ahead of EAFE, while the U.K. and Europe each moved up a notch.  Canada was the weakest region this past week, losing significant momentum in the face of a global rally and falling from sixth to tenth.  Latin America remains on the bottom although it bounced strongly and narrowed the gap between itself and higher ranked regions.


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.


“Unfortunately,Thursday’s meeting will be another fine display of verbal reassurance from Mario Draghi with no new policies to offer. Contrast that with the BOJ’s Haruhiko Kuroda – the market’s new ‘Man of Action’.”

Kit Juckes, Analyst at Societe Generale


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