The end-of-summer is almost upon us. Labor Day marks the unofficial end of the season, though purists will insist on sticking with the autumnal equinox definition, which falls on September 22 this year. If you follow the financial news, then you don’t need a calendar to know what time of year it is because the Kansas City Fed hosted its annual end-of-summer symposium in Jackson Hole, Wyoming last week.
This was the first Jackson Hole event since Janet Yellen took over the reins of the Federal Reserve, and as everyone expected, she was the keynote speaker. However, anyone listening to that speech with hopes of learning when the Fed would begin raising interest rates had to be disappointed. Ms. Yellen stuck to her guns and kept the Fed’s flexibility intact by not committing to any specific timetable or trigger point regarding rates.
The Chairwoman acknowledged the economy was improving and progress has been made in the labor market, including a 6.2% unemployment rate and 700,000 fewer long-term unemployed citizens. However, she also revealed her distrust of those figures by continuing to cite data such as the number of part-time workers who want full-time work has climbed, pointing out wage growth hasn’t happened, and reiterating her need for “further evidence” of full employment.
Stocks ignored the events in Wyoming and continued their upward march. The S&P 500 traded above 2000 for the first time in its history on Monday and booked its first close above 2000 on Tuesday. This S&P 500 doubling from 1000 to 2000 appears to have taken only five years when looking at a five-year chart. However, stepping back to look at the big picture reveals the S&P 500 went back-and-forth across 1000 many times. Its first encounter with that level was in 1998, sixteen years ago.
The “Rule of 72” states the value of something will double when the multiplication of years and annual return equals 72. Applying that rule to the S&P 500 implies it has produced an average annual gain of about 4.5% since 1998 – not very exciting. Of course, that is just price appreciation. If you add in dividends, then the return is closer to 6.2% per year.
All sectors are now in the green as Telecom finally decided to join the party. Technology sits at the top of the stack, but after six weeks of going solo, it now finds itself in the uncomfortable position of having to share that space. Health Care climbed a notch to second place in our previous update, and this week it matches Technology’s momentum score to create a first-place tie. Consumer Discretionary continued its climb in the rankings, this week moving up two places to third. Financials turned in the best price gain of any sector over the past week, and we can’t remember the last time we were able to say that. Financials moved up two places to fourth in the process – its highest ranking in five months. The rise of Consumer Discretionary and Financials pushed both Real Estate and Materials down two notches. Industrials and Consumer Staples swapped places, although both continue to lag the broader market. Energy, Utilities, and Telecom bring up the rear again today. As noted earlier, Telecom has now moved to the positive side of the momentum ledger.
The style-box rankings make it appear that U.S. stocks marched upward in unison the past week, ignoring differences of size and value/growth characteristics. All categories posted either a 5 or 6-point improvement in momentum, and all maintained their prior-week ranking positions. The market prefers Growth to Value with Large Cap Growth at the top, Mid Cap Growth in third, and all three Value categories in the lower half of the rankings. Last week, Micro Cap was the lone style category in the red and we noted that it shouldn’t take much upside action to push it into the green, and that is exactly what happened.
China kept its first-place position although its margin over second-place Latin America shrunk further. The duo has owned the top of the rankings for seven weeks, and they show no sign of letting go. Emerging Markets occupies the third spot for the fifth week, which is not as long as its two major constituents have been at the top. The difference is because Canada was inserting itself into the mix in late July. Pacific ex-Japan, Canada, and the U.S. now form a three-way tie in the middle of the pack. World Equity and Japan swapped places, with Japan falling lower this week. Unlike the sector and style ranking categories that are now all in the green, three global categories remain mired in red. The U.K. and EAFE are close to breaking to the plus side while Europe continues to lag behind.