It’s Silly Season for Market Forecasting
Brokers, analysts and market pundits are issuing 2010 forecasts at an unprecedented pace. We are sorely tempted to join in the fun, but the truth is no one knows what the new year will bring. All these predictions are guesswork – some more educated than others. Those who turn out to be right will be honored, and those who are wrong will forget they ever said anything. Annual forecasts often have more entertainment value than useful investment advice. We sometimes find it helpful (or amusing) to observe whether the recommended securities move as anticipated, but twelve months is a long time for the markets. A quick look back at 2009 should convince anyone that much can change in a year.
A U.S. trade panel has approved a new duty on Chinese pipe used in oil production. Trade wars rarely turn out well for anyone, even the politicians who think they can gain favor with protected industries. The London Telegraph reported this week that the U.S. government has imposed at least 46 separate protectionist measures on various goods and services brought into the country. The European Union has implemented 90 such measures. The targets, mainly China and India, are now in the process of retaliating. The resulting drop in trade will add yet another parallel to the Great Depression.
On Christmas Eve the Treasury Department, apparently hoping no one would notice, quietly announced it was giving an unlimited credit line to Fannie Mae and Freddie Mac, the formerly government-sponsored mortgage enterprises that are now government agencies disguised as private companies. Exactly what this means is unclear. Our best guess is that it means the Obama Administration intends to dramatically increase support for the housing market, or at least sees a need to keep all its options open. This does not indicate a high level of confidence that economic recovery is right around the corner – of course, the White House is probably no better at market forecasting than the analysts mentioned above.
The 10-year Treasury rate looks like it will end the year around 3.8%, considerably higher than the 2.3% range this time last year. Short-term rates have barely budged, however, beginning and ending 2009 just slightly above zero. The yield curve has steepened dramatically since the recession began. Just a little more than two years ago, money market funds were yielding more than 10-year Treasurys are today. Almost unbelievably, short-term rates were at 5% only three years ago, an income level now almost impossible to find without substantial risk to principal.
Gold prices have corrected sharply since challenging $1,200 in early December but seem to have stabilized above $1,000. This area previously represented long-term resistance and now looks more like support. The U.S. Dollar Index chart looks almost like the inverse of gold, though some would debate which market is leading and which is following. If, in fact, gold holds above $1,000 then the dollar rally may be close to an end.
Technology recaptured the top sector ranking, barely edging out Telecom. Materials had a good week and moved back into the #3 spot. Consumer Discretionary and Health Care round out the top half of the list. The three sectors of Financials, Consumer Staples and Energy are not often associated with each other, but this strange trio once again monopolizes the bottom of the rankings this week. All three still have positive momentum but are lagging behind everything else.
The top six positions in our Style table are all tightly bunched, giving the appearance of a near six-way tie for first place. These six happen to be all the Mid Cap and Small Cap categories, suggesting that the seasonal strength in small caps just might prove to be reliable this year. Small cap indexes are just barely above their September peaks while the Large Caps have a greater margin. However, Small Caps had relatively poor performance in October, so their recent strength may simply be a case of playing catch-up.
The U.S. maintained its position on top of the world for another week, while Latin America held onto second place. Canada moved up to third as crude oil and other commodity prices showed some strength. China is still in last place, the only category in our tables showing an intermediate-term downtrend, and has been losing relative strength to the U.S. since late July. The rest of Asia, Japan and Europe are in the middle of the pack with moderately positive momentum.
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.
“Protectionism is the ally of isolationism,
and isolationism is the Dracula of American foreign policy.”
William G. Hyland
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