President Obama delivered his annual State Of The Union (“SOTU”) address last night, and like the majority of these speeches that came before, it contained more political rhetoric than actual status. From an investment viewpoint, the most interesting item was the announcement of myRA.
My Retirement Account (“myRA”) is “a new savings bond that encourages folks to build a nest egg.” The U.S. Treasury will be selecting a private-sector money manager to run the program, and the President said, “myRA guarantees a decent return with no risk of losing what you put in.” Details of the proposal are not yet available, but it will be targeted toward people without 401(k)s or similar plans. A key feature to making such a program a success will be automatic enrollment, which requires the cooperation of employers.
The last Federal Open Market Committee (“FOMC”) meeting under the helm of Ben Bernanke completed today. To no one’s surprise, the Federal Reserve announced the second round of tapering on its monthly bond-buying program. The $10 billion monthly reduction puts the February pace at $65 billion, which falls in line with the Fed’s stated goal of gradual and measured reductions. The fact the reduction received unanimous support was a surprise though, as this is the first policy meeting since June 2011 without a dissenting opinion.
Earnings season is in full swing, and conflicting company outlooks are creating additional volatility in stocks. After a few years of rather mediocre results, Caterpillar (CAT) surprised analysts with its optimistic view and belief that the worst of the mining downturn is now in the rearview mirror. Even though earnings and revenues were down, the stock jumped. Apple (AAPL) went the other way. The company beat forecasts for both revenue and earnings, but it announced lowered guidance for next quarter causing the stock to fall nearly $50 the following two days.
Health Care remains on top despite losing nearly half of its momentum this past week. Hefty declines across all major equity categories drastically altered the complexion of the rankings since our previous update. All sector categories were in the green last time, while four have now succumbed to the selling pressure and are registering negative momentum. The relative rankings of the top three are unchanged with Technology and Industrials lined up behind Health Care. Utilities demonstrated why it is traditionally classified a defensive sector by climbing five spots during a week of market setbacks. However, don’t confuse “defensive” with “inverse” as Utilities lost momentum and declined in price while making this climb. Real Estate moved up three spots to fifth place by holding its losses to 1% the past week. Financials slipped from fifth to seventh, while Telecom held its ground in sixth place. Materials was a big loser on the week, declining more than 4% in value and flipping over to a negative trend. The sector is bouncing strongly today in an attempt to reverse this slide. Three other sectors moved into the red this week with Consumer Discretionary, Consumer Staples, and Energy crowding the bottom of the rankings.
If you couldn’t see the advantage Micro Cap had over the other categories last week, then today’s chart should make it even more obvious. All eleven categories are still posting positive momentum, but a few are on the verge of losing that status. The top five categories are the same as in our previous update. Small Cap Growth and Small Cap Blend are second and third behind Micro Cap, indicating that relative strength remains with small company stocks for now, despite the market pullback. Large Cap Growth and Mid Cap Growth complete the upper tier, which makes Growth versus Value a determining factor of current relative strength. The other two Mid Cap categories find themselves tucked below Mid Cap Value, giving the trio control of the middle ground. Small Cap Value can’t keep up with the other Small Cap categories and can be found near the bottom among the Large Caps. Mega Cap moved up one notch, pushing Large Cap Value to the bottom.
Red is the new predominant color among the global ranking categories. Last week, four were in negative territory, and today the number jumps to seven. Additionally, the magnitude of the negative readings swamp those still in the green. From a “relative” strength standpoint, nothing has changed – all eleven regions are in the same order as a week ago and the week before that. Europe sits on top with the U.K. following close behind. The U.S. is still in third, but the Global Edge chart makes it more obvious than either of the others that the U.S. is in jeopardy of slipping into a negative trend. EAFE rounds out the upper tier and is on course to soon be grouped with the negative trending regions. World Equity, Japan, and Canada all flipped over to negative trends this week. Japan received a nice boost from a rising yen, but it wasn’t enough to change the outcome. The four categories in the red a week ago are deeper in the negative zone today. Pacific ex-Japan, Emerging Markets, China, and Latin America are all in bearish downtrends. Latin America is now at a new four-year low.