11/12/14   Political Market Swings

Editor’s Corner

Ron Rowland

The U.S. held elections a week ago, and we can now determine the market’s early winners and losers.  There is no guaranteed relationship between the event and the market’s subsequent moves, and the old adage that “correlation does not imply causation” certainly applies here.  With that disclaimer out of the way, it can still be insightful to see how various market segments performed the past week, and then ascribe whatever level of election causation makes you comfortable.

Energy has easily been the top performing sector since the election.  Energy stocks have been among the worst performers over the past five months, making it easy to declare recent action being just a technical bounce and that it was purely coincidental the bounce occurred this past week.  However, energy has been a political football and many analysts, both market and political, will claim energy was present on many ballots.  From the coal mines of Kentucky to the Keystone Pipeline, energy is being viewed as an election winner.

Today, crude oil closed at a three-year low.  It has been trending lower as domestic production has sharply increased.  Our country’s dependence on foreign oil has been cut in half the past 10 years.  Previously, 60% of our consumption relied on petroleum imports, while today it is less than 28%.  According to an article on the front page of today’s Investor’s Business Daily, this dramatic move toward energy independence came despite the lack of a supportive energy policy.  In fact, many view our nation’s energy policies as restrictive, and the election should help change that.  Our strides in production have lowered the price of oil to the point we have created chaos with OPEC, an achievement many thought to be impossible.

Telecom has been the weakest sector since the election.  While it may be easy to point to events other than the election that had a bearing on its performance, there is no denying the major force was political.  President Obama asked the FCC to declare broadband internet service a public utility.  Since its inception, the internet has flourished under a system of free enterprise and light regulation.  Making it a government regulated utility adds to the bureaucracy and politicizes the discussion of net neutrality.  With political risk comes investor uncertainty, and telecom stocks reacted negatively.

Health care stocks have also lagged since the election.  They have thrived much of the past year despite the fact many analysts believed they would falter under ObamaCare.  The elections bring a new level of uncertainty to ObamaCare and to the health care sector.

Investor Heat Map 11/12/14

Sectors

Utilities climbed back into the #1 spot after relinquishing it to Health Care for a week.  Health Care didn’t go far, landing softly in second place.  Utilities and Health Care have been the only sectors to occupy the top slot for the past eleven weeks.  Real Estate holds third place again and has not been ranked any lower for five weeks straight.  Consumer Staples completed its ninth week of being ranked no lower than fourth.  These top four sectors are exhibiting above-average consistency and have been providing market leadership through both good times and bad.  Not to be overlooked, Financials just completed its twelfth week as a member of the top five.  Industrials, benefiting from a strong transportation group, climbed a notch to sixth and is closing in on Financials.  Technology slipped a place, and there is a noticeable drop-off in the momentum scores of lower ranked categories.  Consumer Discretionary edged ahead of Telecom.  Materials had a great week and moved back into a positive trend.  Energy performed even better than Materials.  It was enough to shrink its negative momentum, but not enough to move it out of last place or change the color of its trend.

Styles

The style categories are even more compressed than a week ago.  If you remove the top and bottom categories, the nine in the middle all have nearly identical momentum scores within two points of each other.  Adding back the upper and lower extremes (you can’t really call them outliers) only increases the range by two points in each direction.  Given the momentum consistency across the style categories, we are going to declare that Small Cap Growth is in first place, Mid Cap Value is in last place, and the other nine are in a virtual tie for second place.  Although all categories have similar momentum, we still need to sort them quantitatively.  In this regard, the three Growth categories are currently in the upper half while the three Value categories lag behind.

Global

With ten of the eleven sector categories in the green and all styles showing similar strength, it is refreshing to see more variation among the global categories.  For the second week in a row, there are just four categories in the green.  They are the same four as last week, although there has been some minor shifting in their order.  The U.S. is at the top again today, a position it has held seven of the past eight weeks.  Its formerly slim margin has widened significantly, as most other regions could not keep pace.  World Equity climbed two places to second and pushed Japan and China both lower in the process.  All categories below are still in the red.  Pacific ex-Japan held steady in fifth, as EAFE and the U.K. each climbed a spot.  Canada had a good week thanks to the rebound in the Energy sector, which helped push it two spots higher and put it in position to challenge the U.K. for seventh.  Emerging Markets fell three spots and Europe slipped one.  Latin America lost momentum again and solidified its position on the bottom.

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.

 


“Lack of transparency is a huge political advantage. Call it the stupidity of the American voter, or whatever, but basically that was really critical to get the thing [Affordable Care Act] to pass. If you made it explicit that healthy people were going to pay and sick people get money, it would not have passed.”

Jonathan Gruber, MIT economist and a key architect of ObamaCare


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