Financials Have Friends in High Places
To no one’s surprise, the Federal Reserve left interest rates unchanged at its policy meeting today. A few people had hopes the Fed would enlarge its $300 billion Treasury bond-buying program, but the committee said it “anticipates that the full amount will be purchased by the end of October.” Other language in the statement leaves the door open to do just about anything, so we would not take this timing to the bank just yet. The Fed still has a long way to go in its much larger plan to buy $1.25 trillion in mortgage-backed securities, having only bought about half that amount so far.
Bernanke and his crew also left in place their promise to use “all available tools” to promote economic recovery and price stability. Of course, they were already using all available tools and have been doing so for months. The problem is that their tools are not working. The Fed also thinks “inflation will remain subdued for some time” despite rising commodity prices because of “substantial resource slack.” Translation: An economy increasingly composed of empty buildings, idle factories, and unemployed/underemployed workers is not likely to overheat any time soon. This is not exactly an enthusiastic forecast.
Of course, this comes from a Federal Reserve chaired by Ben Bernanke, who failed to foresee the housing bubble and arguably made the crisis much worse with a loose-money policy. His skill for seeing economic trends in advance is questionable at best. This is why there is much debate whether he will be reappointed to another term. The consensus seems to be that Bernanke’s job is safe, if only because he is a known quantity and the Obama Administration does not need another battle to fight.
Stock buyers seemed encouraged today and drove the major benchmarks significantly higher. The S&P 500 has been dancing around the 1,000 level for a couple of weeks now. Further gains are entirely possible, but we continue to think that progress will be slow from here on. The rally of roughly 50% in six months was actually concentrated in a total of about six weekly periods, with markets more or less flat during much of the rally. That does not mean the gains were not real, but – as is typical in bear markets – few investors, other than the ones that rode the market down, had a chance to capitalize on them.
Treasury yields swung both directions today but ended nearly unchanged and remain near the middle of their recent trading range at 3.7%. This week’s auctions have generally gone well, and the Treasury is still borrowing money at relatively low rates. Their ability to do so is good news for the federal deficit but not so encouraging for the economy. For those with money to lend, the federal government is just about the only credit-worthy borrower. As long as this situation persists, it is hard to imagine either economic recovery or continued improvement in corporate earnings. Caution is still the best policy.
Financial Services is now the #1 sector, which is ironic since it is the group that bears primary responsibility for the current doldrums. Obviously it pays to have friends in high places. One could look at it another way, too: the stocks that fell the hardest are also showing the biggest bounce and new highs are still a long way off. Materials slipped to second place as key player Rio Tinto (RTP) came under pressure in a Chinese corruption allegation while BHP Billiton (BHP) had an earnings disappointment. Technology lost more relative strength as it now enters the fourth week of a narrow trading range. The sideways action shows no sign of turning into a correction for technology; at this point it still looks like a normal consolidation. Energy continued to slide as buyers appear unconvinced crude oil can stay above $70.
There were changes at the top of our Style rankings as Mid Cap Value and Small Cap Value took the top two spots. Last week we mentioned how the top tier was tightly packed, which remains the case, so at this point we would not read too much into minor shifts in the relative rankings. Mega Cap and Large Cap are the weakest groups, and the range between top and bottom widened.
Latin America jumped from #5 all the way to #1, but the top five global markets remained tightly clustered. All categories saw a reduction in absolute strength, with China showing the largest drop in both absolute and relative terms. Japan is still on the bottom. The U.S. dollar staged a rally but quickly encountered resistance, leaving its intermediate term downtrend in place for now.
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.