11/07/12   Status Quo

Editor’s Corner

Ron Rowland

The election is over.  It’s status quo in Washington, with the White House, the Senate, and the House all pretty much unchanged.  The markets are a different story and were anything but unchanged today.  Stocks plunged, Treasury bonds soared, and volume screamed.  The Dow Jones Industrial Average was off 369 points during the day but managed to finish with “only” a 312 point drop.  Declines in excess of two percent were the norm for major stock benchmarks.

For investors, it’s now back to the reality of Europe sitting on the brink and the U.S. on the verge of driving itself over the fiscal cliff.  Neither can be easily resolved.  Any potential solutions will likely require enormous sacrifice by various segments of the population.  It’s not at all clear the affected groups will have the fortitude for any proposed solutions to achieve success.  Greece is currently the pioneer in this regard, blazing the trail for the rest of the world.  So far, no one seems anxious to follow that path.

We’ve talked a lot about uncertainty lately, much of it related to the election.  The uncertainty regarding the occupant of the oval office has been removed.  However, from the market’s perspective, there is now an even larger uncertainty regarding income taxes, dividend taxes, capital gain taxes, employment taxes, and health care costs.  If higher investment related taxation does become a reality, it will likely trigger massive selling by investors trying to maximize their after-tax profits by taking advantage of current rates.  

Stock quote screens were covered in red today with only the occasional green blip.  The mortgage finance industry is one of two Dow Jones Industry Groups posting gains today, gold miners being the other.  The 10-year Treasury yield fell dramatically, closing at 1.63%.  This sent T-bond prices soaring, while other bond categories were mixed.  Investment grade corporate bonds posted more modest gains, and junk bonds fell.

Last week’s employment report showed an uptick in unemployment to 7.9% along with the creation of 171,000 new jobs.  The report didn’t spark the fireworks we were anticipating, but the jobs picture is still bleak and far from being resolved.

Investor Heat Map: 11/7/12

Sectors

It’s getting crowded at the top.  Three sectors are now tightly bunched and vying for the title of Top Sector.  Financials holds that moniker for now but is facing a strong challenge from both Consumer Discretionary and Industrials.  Consumer Discretionary has been no stranger to the upper tier of the rankings this year, but Industrials is a newcomer.  Industrials moved up from a fifth place position a week ago after languishing in the lower half for many months.  Materials held on to its fourth place spot despite short-term gyrations in commodities and mining stocks.  Health Care slipped from second to fifth, as the recent pressure on Biotechnology stocks seems to be spreading through the sector.  Energy and Consumer Staples have trendless momentum readings this week even though their day-to-day actions appear to be quite volatile.  There are three sectors with negative readings again this week, although not the same ones.  Energy barely escaped that fate while Utilities joined Telecommunications and Technology on the downside.

Styles

Once again we have all three Value categories sitting in the top four slots.  However, we have a new overall Style leader with Mid Cap Value taking that honor away from Large Cap Value.  All eleven categories posted performance gains and momentum improvements over the past week, although today’s downside market action is taking that all away.  Mid Cap Blend remains in third place, preventing the Value trio from having oligopoly control on the top. The rotation to Mid Caps is also evident in Mid Cap Growth, which managed to improve its relative ranking and put some distance between itself and the other two Growth categories.  Extremism and Growth are the laggards with negative momentum this week.  The bottom four slots are occupied by Micro Cap, Mega Cap, Large Cap Growth, and Small Cap Growth.

Global

China increased its lead over the rest of the world.  Economic reports out of China are starting to show improvement.  Pacific ex-Japan and Europe held on to their second and third place positions.  Europe’s problems are moving back to the front page as riots broke out in Greece today amid a two-day anti-austerity strike.  Emerging Markets jumped ahead of EAFE primarily as a result of the strength in China.  Canada and the U.K. swapped positions, but since they have the same numerical reading, the relative positioning carries little weight.  The U.S. and Latin America were able to shed their negative momentum readings this week, although with today’s market action it looks highly probably they will soon get them back.  Japan is the only Global category in the red this week and shows no signs of relinquishing its hold on last place.

 

Note:

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.

 


“The American people re-elected the president, and re- elected our majority in the House. If there is a mandate, it is a mandate for both parties to find common ground and take steps together to help our economy grow and create jobs, which is critical to solving our debt.”

Speaker of the House John Boehner, 11/7/12


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