12/18/13   Ben’s Swan Song?

Editor’s Corner

Ron Rowland

Today, the last FOMC meeting of 2013 concluded.  Ben Bernanke’s reign as Fed Chairman expires January 31, so his role in the January 24 and 25 FOMC meeting is not clear.  The transition to Janet Yellen as Fed Chair might take place early on the first day of the two-day event, in which case it would be her meeting and her post-meeting press conference.  Many analysts are speculating today is Ben’s last post-meeting appearance in front of the cameras, suggesting they also believe he will release his grip on power prior to January 31.

History will remember the Bernanke Fed for the steps taken to address the financial crisis, such as introducing various forms of quantitative easing.  The Fed’s $85 billion monthly asset purchase program has been a significant part of the Fed’s activity and ultimately part of Ben Bernanke’s legacy, so it was probably fitting the first step toward unwinding that program was announced today.

The best summary of today’s decision comes directly from the Fed’s statement: “In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases.  Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.”

In helping to set expectations, the Fed emphasized that future changes would be moderate, measured, data dependent, and may not occur at every meeting.  Additionally, it reminded everyone that interest rate policy was a separate item, and 15 of the 17 Fed governors see no change to the current interest rate policy of 0%-0.25% through the end of 2014.

“Now that you have introduced tapering into the system…” began one question from the press conference.  We didn’t hear the rest of the question, or the answer, because we were taken back by the lead in.  Tapering is not introducing anything new into the system but is simply the first step toward removing an outside influence that was previously added.  The bond buying program commenced two years ago, and it’s a monetary stimulus that’s been running at $85 billion a month for many months.  Today, the Fed said it was going to start down the path of discontinuing that stimulus by reducing the purchases by 12% to $75 billion per month.

Talk of tapering has made the stock market jittery the past few months.  However, now that it has arrived, stocks have welcomed the news.  The Dow Jones Industrial Average shot up 292 points, the Financial and Health Care sectors surged more than 2%, and international stock proxies joined the upside move.

Investor Heat Map: 12/18/13


It was somewhat of an unsettling week for stocks as all equity groups lost some of their upside momentum.  Technology held on to its recently acquired top position in the Sector rankings, although Industrials moved up a notch and is in hot pursuit.  Based on recent action, we predict Industrials will be successful in overtaking Technology by our next update.  Consumer Discretionary climbed a spot to third this week, but it is not showing any signs of new strength.  Instead, it is merely holding on to recent gains better than many other groups.  Homebuilders are up strongly today on the heels of the big jump in housing starts in November while retailers are decidedly mixed.  Materials moved up to fourth even though commodity prices are still in a 32-month downtrend.  Health Care was the big loser this week, dropping from second place to fifth.  Profit taking across all segments of Health Care appears to be the cause of the drop, and the uptrend is still intact.  Consumer Staples and Energy weakened and are now vulnerable to losing the last crumbs of their upside momentum.  Telecom joined Utilities and Real Estate, making it three Sectors in the red today.


All of the Style categories are still in the green today, although the number of green pixels required to make the chart is obviously shrinking.  Compression in the rankings is clearly evident with six categories bunched together in the middle and posting momentum readings of either 14 or 15.  Micro Cap and Large Cap Growth have successfully remained above the congestion in the middle, although Large Cap Growth could easily get sucked in.  Mid Cap Blend, Large Cap Value, and Mid Cap Value sit at the other end of the list, but we feel obligated to reiterate the fact there is not a whole lot of difference between first place and last place.  There always has to be something on the bottom in any relative ranking, and that undesired honor falls to Mid Cap Value again this week.


China relinquished its top-ranked Global position to the U.S. this week by falling down to fourth place and nearly eliminating any signs of upward momentum.  A visual inspection of China’s chart portrays a less ominous situation, and it could even be setting the stage for another powerful rally.  The U.S. is now on top, although its margin over second place Europe is quite small.  World Equity also improved its relative ranking as a result of China’s drop.  The U.K. held on to its fifth place spot but is having a more difficult time hanging on to its positive trend.  Four categories turned red this week, which puts the majority of regions in negative trends.  EAFE, Japan, Canada, and Emerging Markets are the four that flipped from positive to negative.  Latin America and Pacific ex-Japan had disappointing returns the past week, accelerating their downward trends.


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 Committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

12/18/13 FOMC statement


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