Don’t Look Now But US Markets Are On Top
Holidays or not, the economic news keeps on flowing. The latest 3Q revision for Gross Domestic Product came in at an annualized growth of +2.2%, lower than the previous revision to +2.8% and well below the +3.5% initial report two months ago. As always, drilling into the numbers is enlightening. The Bureau of Economic Analysis noted that automobile production accounted for 1.45 percentage points of the 2.2% quarterly change. This is roughly two-thirds of the quarter’s economic growth. If auto sales had simply stayed steady, GDP would have risen only 0.75% in the third quarter. Had auto sales actually continued to fall as they did in previous quarters, GDP could easily have been negative.
A similar phenomenon is underway in the housing market. Existing home sales surged 7.4% in November, bringing the twelve-month change to +44.1%. More interesting, the median home price fell -4.3% in the last year. More sales at lower prices suggests many homeowners were selling in distress. Buyers, on the other hand, had the benefit of very helpful tax credits.
Homebuyer tax credits and “Cash for Clunkers” obviously helped the housing and automotive sectors. Stimulus works – at least in the short run. To the extent that these programs accelerated sales that would have taken place anyway, a reversion in the other direction is probably coming. Moreover, the reports don’t reflect the negative impact that was spread through the rest of the economy in order to help those two industries.
Treasury yields leaped higher in the last few days, with the ten-year ending today at 3.75% vs. 3.20% at the end of November. Traders seem to have concluded that the Federal Reserve will not be able to tighten monetary policy in the foreseeable future, raising the risk of inflation. Oddly, though, gold prices are on the retreat, now back below $1,100, and inflation protected bonds declined. Inflation fears are theoretically bullish for gold and bearish for the dollar, which is probably why the dollar has plunged in recent months. It is too soon to know if the counter-trend rally that is now unfolding will turn into a new trend. In the meantime, just remember that markets are not always rational.
Telecommunications retook the top spot in our sector rankings after relinquishing that position for a week. Consumer Discretionary, the short-lived occupant of that position, slipped as more evidence emerged that many retailers are struggling. Technology moved back into the #2 slot amid analyst upgrades for semiconductors and other technology related industries. Consumer Staples had a rough week and now finds itself at the bottom with the other “also ran” sectors of Energy and Financials.
Many waistlines expand during the holiday season, and it appears the style box is suffering from a similar affliction. The two vertical extremes of the style box, the MegaCaps (the head) and MicroCaps (the feet), both find themselves at the bottom of our rankings today. The middle of the style box, the MidCap waistline, is posting the big numbers and expanding momentum. The three MidCap categories all broke out to new 52-week highs this past week and are leading the charge as the year winds down.
You may have to rub your eyes and take another look at our global rankings. However, your eyes are not deceiving you. That is actually the USA on top of the list, and it is even enjoying a healthy margin over the former #1 – Latin America. Two weeks ago we discussed the fact that many investment categories were exhibiting high inverse correlation to movements in the dollar. The changes in our global rankings are further evidence of this coupling as the US dollar put in another strong showing this past week. A strengthening dollar hurts the performance of foreign investments when translated back into US dollars. A strengthening dollar also hurts commodities and commodity producers, since those products are now cheaper when purchased with greenbacks. When investing in foreign countries with an economy highly dependent on commodities and natural resources, this is a double whammy. At this time, we are not convinced the dollar rally will turn into a significant move, although it is prudent to understand how a stronger dollar may impact your holdings.
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.
“Markets can remain irrational longer than you can remain solvent.”
John Maynard Keynes
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