Last week, when Fiscal Cliff negotiations started to break down, the Republican led House pulled out Plan B. However, that particular backup plan was essentially dead-on-arrival when the House vote was canceled. On Thursday night, Plan B was abandoned due to a perceived lack of votes in favor of the measure. Markets displayed their displeasure by selling off on Friday as our elected officials started heading home for the holidays.
The U.S. budget is way out of balance. In simplistic terms, Democrats want to resolve the issue with more taxes while Republicans prefer to cut spending. Anticipating that opposing sides of the aisle may not be able to reach agreement on how to fix the budget problems, many automatic policy changes were put in place. The clock is quickly ticking down to the end of the year, when many of these spending cuts and tax increases kick in. Although these Fiscal Cliff items are viewed as a step in the right direction, the fact they go into effect all at once is viewed as potentially devastating to an already fragile economy.
Today, lawmakers are heading back to D.C., presumably to get to work on Plan C. Even President Obama agreed to cut his vacation short so he could be in Washington on Thursday and Friday to help hammer out a plan. We’ll know in a couple of days if their final attempts to avoid the Fiscal Cliff bear any fruit.
The Federal Reserve has been busy buying mortgaged-backed securities in an attempt to drive mortgage rates lower and spur the housing market. In many respects, its plan is working – mortgage rates are the lowest in generations and housing prices are stabilizing or increasing in many parts of the country. However, based on historical spreads between mortgage rates and the yield on mortgage-backed securities, many analysts believe homebuyers should be getting mortgages at 2.8% instead of the 3.4% national average. The difference is being blamed on the banks. Instead of passing the savings on to borrowers, as was intended, the banks are keeping the extra profits for themselves.
Industrials remains on top, extending its reign to three weeks. The sector is receiving a boost from strength in the Transportation industry. Financials closed most of the gap on Industrials but was not able to take over the lead. Materials climbed another spot and is also making a play for the #1 ranking. Consumer Discretionary, the former top-ranked sector, slid another notch and is now in fourth as holiday retail sales failed to meet expectations. Health Care and Telecommunications held on to their fifth and sixth place rankings, although they both lost momentum over the past week. Energy turned in a below-average performance for the week but still managed to improve its relative ranking a notch. The bottom three sectors are barely able to post positive scores today. Consumer Staples, Utilities, and last place Technology are in danger of flipping over to negative trends.
Small Cap Value moved up to become the #1 ranked style. Mid Cap Value, which occupied the top spot the past eight week, remains strong and holds the second place position. Small Cap Blend also improved its ranking, moving up two places to third. The Mid Caps turned in uneven performances with Mid Cap Blend slipping a notch to fourth while Mid Cap Growth climbed up to fifth. Large Cap Value lost the most ground from a relative strength standpoint, slipping from fourth all the way to seventh. However, its momentum only dropped a couple points, indicating the changes are mostly a result of the high degree of compression across the middle band of the Style rankings. Only Small Cap Growth is preventing the four largest capitalization categories from having an oligopoly on the bottom positions. Mega Cap is on the bottom and is the only category with negative momentum.
The back-and-forth tussle between Europe and China over which one gets to sit at the top of the rankings was resolved in favor of Europe this week. China is close behind in second, and stocks there posted better than 2% gains yesterday while markets here were closed for Christmas. Japan was the big winner this week, both in absolute and relative terms. Most U.S.-listed mutual funds and ETFs investing in Japan posted gains of better than 2%, even with the headwind of a declining yen. Subtracting out the negative impact of currency translation, Japanese stocks actually rose closer to 3%. This strong performance, on the heels of the recent election results, propelled Japan from eighth to third in our Global rankings. EAFE held its fourth place position as Pacific ex-Japan, Emerging Markets, U.K., and World Equity all slid lower as a result of Japan’s climb. The three categories representing the Western Hemisphere continue to reside at the lower end of the Global rankings. This week, the U.S. occupies the bottom spot.
“Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example.”
Shinzo Abe, Japan’s incoming Prime Minister
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