Do you remember the resolution to the government shutdown in October? Congress agreed to reopen and fund the government through January 15, 2014. Yes, all they really did was buy a 3-month extension on the deadline. Everyone seemed to be concerned that we were being set up for a repeat in January. After all, getting both parties to agree on anything significant seems to be an obsolete idea.
That’s why last night’s budget deal is so surprising. The deadline is still more than a month away, and the compromise didn’t require a lot of public bickering. Perhaps the nation’s displeasure with its elected officials is finally starting to sink in. Today’s Wall Street Journal includes the results of a recent poll reflecting Americans’ views on how well Congress is doing its job. A full 79% of the respondents claimed the performance and accomplishments of Congress are “below average” or “one of the worst.” This is a record negative response for a poll that began in 1990 and never had a negative reading above 55% until the past few years.
The primary goal of the new budget agreement is to avert another government shutdown and the uncertainty it creates. Major points include a $63 billion increase in defense and various domestic programs in 2014 and 2015. These increases are coupled with an $85 billion deficit reduction over 10 years. Both the House and Senate need to vote their approval before it becomes final, but given the modest line items in this agreement, most objections will likely be fleeting political photo-ops.
There are critics of the deal, and most of them are complaining about the lack of any real substance. However, agreement and compromise need to start somewhere, and this appears to be a step in that direction. The Fed holds its last FOMC meeting of the year next week. In the past, it has cited the lack of a budget deal as one of the reasons not to begin tapering its monthly bond purchases. The probability the Fed will announce the start of tapering next week has now increased.
Technology takes over the leadership spot today, climbing up from its fourth place position of a week ago. Technology was at the bottom of the stack in late July as Apple (AAPL) was completing its bottoming process. Apple currently has about a 14% weighting in our Technology sector benchmark and therefore contributes significantly to its performance. Health Care continues to perform well although it had to relinquish its top spot and ease down to second place. Industrials and Consumer Discretionary were also pushed down a notch to make room for Technology’s ascent. These four constitute the upper tier of the Sector rankings. Financials, Materials, and Consumer Staples occupy the middle ground, as they did a week ago. The bottom four are separated into two groups – those clinging to positive momentum scores and those in negative territory. Real Estate posted a great one-week return, but it wasn’t enough to pull it out of last place.
The Style rankings are showing a large amount of compression this week with only eight points separating the strongest from the weakest. Compare this to the 40-point spread in the Sector rankings and 46-point span across the Global categories. Even though the compression is tight, the extremism pattern of the past few weeks remains in force. Micro Cap and Mega Cap, the two opposite extremes of the capitalization range are #1 and #2 in today’s rankings. Large Cap and Small Cap categories hold the next six places. Four of them have identical momentum scores, as does Mid Cap Growth, the strongest of the Mid Caps. With momentum showing so little variation across the categories, the relative rankings could easily be upended by next week.
China remains firmly entrenched at the top of the Global rankings. China ETFs came under selling pressure today, but it was not enough to alter their positive trend. The U.S. moved up a notch to second place despite weakness in the greenback, as a drop in the value of the dollar directly translates to additional gains for foreign-based securities. Europe was unable to keep pace with the U.S. this week and slipped to third. The next four categories are World Equity, the U.K., EAFE, and Japan. They keep their same relative ranking order although all gave up some momentum since our last update. Emerging Markets and Canada swapped places with Canada now in jeopardy of forfeiting its positive trend. Pacific ex-Japan and Latin America are still on the bottom, and both are in negative trends.
“We cheer for a different football team. We catch different fish. We have some differences on policy, but we agree that our country needs some certainty and we need to show that we can work together.”
Senator Patty Murray (D., Wash.) on new budget deal
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