What If Black Friday Isn’t Black?
Since our last report, the major equity benchmarks found new lows and then bounced back strongly, leaving the S&P 500 almost unchanged over five days. But what a ride it was – the intraday low on 11/21 was 741.43 and today’s high was 887.68, a range of almost 20%. As recently as Friday afternoon, traders were wondering if anything could turn this market around. Something did, and its name is Obama. The President-elect’s economic team and his plans for more stimulus spending are getting a warm welcome on Wall Street. For now, stocks have moved past the Great Depression II and are trying to look across the valley of recession. It didn’t hurt that Citigroup (C) was granted a stay of execution. As the very definition of “too big to fail,” Citi was probably never in any real danger of collapse, but shareholders are still not happy campers.
With all due respect to the people who will be taking office in January, we are not sure that it makes much difference who is in the new cabinet. Even Barack Obama cannot restore prosperity with a wave of his magic wand. The news just keeps getting worse. Americans cut spending by a full 1% in October, the biggest consumer pullback since September 2001. Similar statistics from the U.K. were even worse. Meanwhile U.S. durable goods orders dropped twice as much as an already pessimistic forecast expected. The global downturn is shaping up to be a vicious one and recovery is nowhere in sight. Consumer confidence is nothing short of dismal. With the holiday shopping season about to start, retailers must be wondering whether Nov 28th will be “Black Friday” or just “Slightly Less Red Friday.”
One thing that almost always goes up during a crisis is correlation, and this time is no exception. All equity categories, whether sector, style or geographic, have tended to move the same direction at the same time in recent months. This week we are seeing hints of a return to normalcy, with some categories up, some down, and some close to unchanged. This is an encouraging sign, but we fear it may be only temporary.
Treasury bonds made a remarkable move the last few days. The shortest-term T-bills are still yielding close to zero, but now yields on the longer-term notes and bonds are also plunging to new lows. The 10-Year dipped below 3% today while 5-Year notes hovered around 2%. A race of sorts is underway: is there enough appetite for “safe” government securities to soak up the massive amount of new debt the Treasury will issue to fund all the new bailout/stimulus programs? So far the answer appears to be “Yes” and the result is lower yields and higher bond prices. Meanwhile corporate bonds – indeed, anything without a sovereign guarantee – continue to fetch very high yields for those willing to take the risk. We are not among that group.
Despite huge short-term volatility, sector momentum was mostly unchanged over the last week. Materials and Financials are still the weakest sectors while Consumer Staples and Utilities are still the strongest. The sector average barely budged, but don’t assume it implies a generally flat week in the broad market benchmarks. Much like a roller coaster, the market had some nauseating moves while ending up right back where it started.
Value stocks are building a slight edge over Growth, though it is arguable what those terms really mean in this market. Very few companies are growing, and some that were growing like weeds not so long ago now look like amazing values. The main thing the Style rankings tell us right now is that equity investors still associate size with safety. Mega Caps are still on top of the list, followed by all three Large Cap benchmarks. Micro Caps remain near the bottom.
As noted above, inter-market correlations are increasing. It is usually safe to bet on any given day that overseas markets will take their cue from U.S. trading, and vice versa. Short-term variations can typically be explained by currency movement. Canada fell in our International rankings this week for that very reason, leaving our Northern neighbors only slightly better off than Latin America to the South. Otherwise, relative strength in global markets was mostly unchanged.
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.
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the market.”
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