Deadlines can be a powerful tool in helping drive a task to completion. U.S. Treasury Secretary Jack Lew established October 17 as the deadline for extending the debt ceiling. At that point, the country would run out of money, be unable to borrow more, and have no means to pay its bills or interest on its debts. U.S. Treasury Bills have long been the textbook definition of “risk-free” securities. If the U.S. were to default on its payments to holders of those securities, the consequences would be enormous, possibly epic.
With so much at stake, we believed some sort of resolution would occur, allowing the U.S. to avoid default. Some market participants weren’t so sure, creating a Deal On / Deal Off trading environment. You probably recall that every market move back in 2011 was defined by a Risk On / Risk Off categorization. Taper On / Taper Off became the new controlling factor in May of this year when the Fed hinted it was time to think about a stimulus exit plan. Tapering is off the table for now, so the market needed a new catalyst.
Deal On / Deal Off began life about a month ago when investors shed their complacency about the potential for a government shutdown and the looming debt ceiling. Since then, stocks have rallied every time a “deal” was thought to be imminent and dropped whenever talks broke down. A week ago, things weren’t looking too good and stocks were trending downward. Everything looked better on Thursday and Friday, only to become questionable again over the weekend.
Today, the Senate informed citizens it has reached a deal. It plans to vote tonight, and the House indicated it would follow suit with a passing vote before midnight. They successfully averted another crisis at the last minute. Our elected officials had about two years to figure this out, but they performed most of the work in the past two weeks. As we said, deadlines can help bring about resolution. However, similar to most congressional deals of the past few years, this one was mostly another agreement to extend the deadline versus making any real progress on the U.S. budget. It is just another round of kicking the can further down the road.
Unless something happens to upset this apple cart in the next few hours, we should soon have favorable Senate and House votes, a presidential signature, a reopened government, and the ability to borrow more money to pay our bills and debts. Meanwhile, the Treasury claims it found more money, possibly enough to last until the end of the month. Hopefully, lawmakers won’t use this as an excuse to undo the progress made this week.
Our Sector rankings are starting to portray a different characterization this week. Nothing significant yet, but the subtle changes are worth noting. Industrials took over the lead, moving up from second place. Materials followed along, advancing from third to second. Energy has been down and out for a long time but managed to advance into the top-5 today. It is this combination of Industrials, Materials, and Energy ranked in the upper tier that is notable. It is a sign of strength among the non-consumer cyclicals. To make room for this newly evolving regime, Consumer Discretionary slid two places and Health Care slipped one. Technology held steady in fourth by posting stronger gains than the broader market. Four sectors were in the red in our last update, and today they are all back to green. The rising market is lifting all categories, although not equally. Real Estate made a strong move off the bottom, leaving Utilities in last place.
Today, the Style categories appear to be ranked by inverse capitalization instead of momentum with Micro Caps on top and Mega Caps at the bottom. Micro Cap only had to move up one spot to take the lead by swapping places with Small Cap Growth. Small Cap Value continued its upward move, climbing from sixth to fourth this week and joining up with Small Cap Growth and Small Cap Blend. The three Mid Cap categories are trying to control the middle ground. The one anomaly is Large Cap Growth, which has two Mid Cap categories between it and the other Large Cap designations. However, the momentum scores in this area are nearly identical, so relative positioning has little bearing. Last week, Mega Cap had negative momentum and Large Cap Value was flat. They both managed to move into the plus column today on the heels of a strong market move.
Europe remains at the top of the heap. It’s probably fair to say it has benefited from the political turmoil here at home. The developing market trio of Emerging Markets, China, and Latin America are all part of the top-5 Global categories now. Many investors began writing off and dumping their emerging market funds a few months ago, so this latest upward move caught many off guard. Pacific ex-Japan is the other developed region joining Europe in the upper tier. Among the lower ranked categories, Japan made the most impressive move this week, climbing out of last place to land in eighth. Many global strategists thought the yen would benefit from concerns about a U.S. default, but that was not the case, as Japanese stocks did all the work. The English-speaking trio of the U.K., the U.S., and Canada are now hugging the bottom with Canada being the laggard of the bunch.