Another PIIGS Crisis Unfolds In Europe
Stocks are refusing to give up any ground as year-end approaches. The S&P 500, excluding dividends, has now recovered to where it was before the financial crisis hit in September 2008. Equity investors who managed to sit through more than two years of massive volatility are back where they started.
Homeowners and real estate investors in many places are not near as fortunate. The latest S&P/Case-Shiller index of home prices in 20 metro areas marked its third straight losing month in October, according to data released Tuesday. Earlier this year the housing market seemed to be rebounding. Now many analysts are expecting a “double dip” well into 2011. A big reason is the huge inventory of foreclosures that banks must sell. In previously-hot regions like Southern California, losses now rival the worst years of the Great Depression. With unemployment not likely to improve noticeably for a long time, housing woes will continue to overhang the U.S. economy. Yet, as the last two years prove, stocks can still perform well even in such an environment.
Gold and crude oil are also proving to be good performers. The yellow precious metal crossed above $1400 an ounce recently, while oil is hanging tough above $91. A few days ago China’s efforts to cool down growth seemed likely to cap the commodity rally, but it isn’t happening. The U.S. Dollar is meandering sideways but is still in a long-term downtrend. Treasury yields crept higher, though the ten-year rate fell back today to end at 3.34%.
This time last year we were watching Greece go through a sovereign debt crisis that was headed off only by a bailout from the rest of Europe – mainly the Germans. During 2010 the same pattern unfolded in Ireland. Now it looks like Italy may be the next domino. Italian bond yields are surging higher, and institutional investors are reportedly as eager to get out of Italy as they were to escape Greece or Ireland. The exit door is probably not big enough for everyone. It will be interesting to see if European leaders learned anything from their first two lessons.
Once again we are forced to report that the same sectors occupy the top of our rankings. Materials, Energy and Industrials are still the places to be. The last time any other sector appeared in the top three was four weeks ago. Materials stocks continue to be buoyed by strong global commodity demand, despite sluggish economies in most of the developed nations. Energy has a similar story. The Industrials sector is heavily influenced by General Electric (GE) and a handful of defense and transportation stocks like Cummins (CMI), Caterpillar (CAT), United Parcel Service (UPS), and Boeing (BA). These companies conduct a large part of their business overseas and are less affected by domestic weakness. Financials moved up slightly in the rankings on strong gains in the banking industry. The defensive sectors are still in the basement.
Every once in a while, the stars line up just right. Our Style rankings are now in perfect reverse-capitalization order. Micro Caps (the smallest of the small) are on top while Mega Caps (the biggest of the big) are on the bottom. The Small Cap, Mid Cap, and Large Cap categories are neatly lined up in between. Within each group, the order is Growth first, followed by Blend, and Value last. The drop-off in momentum scores is also fairly consistent as we go down the list.
The U.S. and Japan kept their hold on the first two slots of our Global rankings. Canada moved into third, pushing World Equity aside for now. The middle of the pack remains tightly clustered with little change over the last week. Europe slipped back into negative territory, and rising interest rates in China pushed that market further into the red. It is important to recognize that the global benchmarks are all ranked in U.S. dollar terms. Therefore, each represents the strength of its equity markets combined with the strength of its currency. However, with the U.S. dollar moving mostly sideways the past six weeks, currency translation is not having much of an impact at this time.
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.
“This looks like a double-dip is pretty much on the way, if not already here.”
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