Concern surrounding the anticipated tapering of the Fed’s bond-buying program proved to be for naught. At the conclusion of today’s FOMC meeting, the Fed announced no change to its stimulus activities. Investors have no fear of a “Paper Taper”, and the postponement of the real taper allowed both stocks and bonds to shoot higher.
Some analysts are saying this surprise is the result of Janet Yellen now being the frontrunner to replace Ben Bernanke as Fed Chairman in January. In case you hadn’t heard, Lawrence Summers asked to be removed from consideration, citing the acrimonious confirmation process. Yellen is thought to favor keeping the current stimulus in place much longer than either Bernanke or Summers, and today’s lack of action could be a nod in her direction.
Since there was nearly 100% consensus among analysts and pundits that tapering would begin today, perhaps the Fed used it as an opportunity to “prove” they are independent of the market’s will. However, you won’t see that in the policy statement or hear it in the press conference. Mr. Bernanke did come close when he said the Fed wouldn’t let the market dictate its actions. Instead, the Fed is hanging its hat on the fact it would “decide to await more evidence that progress will be sustained before adjusting the pace of its purchases.” The policy statement also reminds us that, “Asset purchases are not on a preset course.”
Speculation now moves to the next FOMC meeting. In case you are wondering, it will conclude the day before Halloween, October 30, also known as Devil’s Night or Mischief Night. Investors are hoping to see neither emanating from the Fed that day. Perhaps by then, we will also know if Janet Yellen is truly on the path to be the next Fed Chairperson.
Immediate market reactions to Fed announcements are often reversed within a day or so. Debt ceiling discussions, Syria, and Obamacare all hold the potential to derail the newfound market euphoria. In the meantime, today’s upward moves look impressive with the Dow 30, the S&P 500, and the Russell 2000 closing at new all-time highs. Interest sensitive groups performed especially well with Real Estate jumping 3.5% and Utilities gaining 3.0%. Gold also reversed its recent slide with a 4.4% pop. Yield on the benchmark 10-year Treasury dropped to 2.71%, undercutting its 50-day moving average for the first time since early May.
Industrials moved up a notch to claim the Sector leadership position. Huge gains in the defense & aerospace industry get most of the credit. Health Care also improved its relative ranking as pharmaceuticals came on strong. Health providers have been contributing to the sector’s upside gains recently but came under pressure today as Speaker of the House John Boehner proposed the defunding of Obamacare. Consumer Discretionary advanced two places to land in third this week on gains in retailing and home construction. All of the improved rankings had to come at the expense of something, and it was Technology that bore the brunt, falling from first to fifth. It’s not as bad as it sounds though, as the Tech sector more or less broke even for the week. Energy held steady at sixth, although most MLP funds posted losses of 2% to 4% for the week. Consumer Staples and Telecom successfully flipped their momentum from red to green. Real Estate posted a good one-week return but remains in last place.
All eleven Style categories increased the magnitude of their momentum scores, indicating healthy upward trends. Small Cap Growth maintains its top-ranked position. A chart of iShares Russell 2000 Growth (IWO), our Small Cap Growth representative, reveals a steady upward-sloping trend channel has been in place for ten months. The width of the channel has been quite narrow with the largest pullback being contained to less than a 5.5% decline. It is currently near the mid-point of its channel, which provides it with additional upside potential. Mid Cap Growth moved ahead of Micro Cap to grab the second place spot. Large Cap Growth keeps its fifth place ranking, which puts all Growth categories in the upper half and all Value categories in the lower portion. Mega Cap continues to trail the pack, suggesting investors are still aggressive.
On a strictly relative basis, China was the weakest region the past week, and this had the effect of lowering its momentum score while other regions saw increases. China retains a firm grip on its first place ranking, although there has been significant erosion in its margin over second place Europe. The top seven regions, from China down to World Equity, are in the same relative order as last week. The U.S. has been falling out of favor for most of the past three months but managed to improve its ranking from tenth to eighth this week. This improvement came despite weakness in the U.S. dollar, which acted as a headwind. Japan, Canada, and Latin America are the three categories trailing the U.S., which paints the entire Western Hemisphere in relative weakness. There could be a shakeup in the rankings after the market digests today’s FOMC announcements. Latin America responded the most positively with a 4.8% one-day surge.