Market Commentary: Most equity markets retreated mildly this past week with the major domestic and international benchmarks pulling back 0.8% and 0.9% respectively. However, there were definitely some pockets of strength, most notably in Emerging Markets, Energy, and Materials. Earnings season is upon us again, and the consensus expectation is for lower year-over-year and quarter-to-quarter results. Reality versus expectations will unfold over the next few weeks and is likely to be a major force driving the market. The weekly see-saw pattern we are following has extended its run to 12 straight weeks with a decline during the four market days from Tuesday to Tuesday this past week.
The bond market seems to be picking up some volatility, but it’s not clear as to whether it is a longer-term trend or a short-term phenomena. We suspect it is (and will be) highly correlated to disclosure of sub-prime lending problems. Many investors are taking a fresh look at risk premiums, and we expect the spread between government and high yield securities to continue to widen as a result.
Sectors: The major market sectors are presently split into two camps – the strong and the weak. There is a clear dividing line between these binary states, making the distinction black & white instead of the gray readings we often encounter. Energy, Materials, Technology, Telecom, and Industrials are in the strong camp while Financials, Utilities, Healthcare, Consumer Staples, and Consumer Discretionary occupy the weak positions.
Styles: After nearly a seven-year non-interrupted relative strength run of Value over Growth, the evidence is mounting that a market favoring Growth is developing once again. Unlike the jolting shift from Growth to Value that took place in 2000, the recent shift from Value to Growth has been quite slow and orderly. Granted there have been a few false starts during the past year, and there is nothing to rule out another false start, but the odds are currently in favor of Growth for all capitalization segments.
International: Global markets remain quite strong, but everything pales in comparison to China. China is once again trending upward at an annualized rate of more than 100%. We typically consider this a frothy reading because it is a rate that cannot be sustained indefinitely. That does not imply that a correction is imminent, as momentum can decrease with a sideways movement or a simple slowdown in acceleration.
Sectors: The major market sectors are presently split into two camps – the strong and the weak. There is a clear dividing line between these binary states, making the distinction black & white instead of the gray readings we often encounter. Energy, Materials, Technology, Telecom, and Industrials are in the strong camp while Financials, Utilities, Healthcare, Consumer Staples, and Consumer Discretionary occupy the weak positions.
Styles: After nearly a seven-year non-interrupted relative strength run of Value over Growth, the evidence is mounting that a market favoring Growth is developing once again. Unlike the jolting shift from Growth to Value that took place in 2000, the recent shift from Value to Growth has been quite slow and orderly. Granted there have been a few false starts during the past year, and there is nothing to rule out another false start, but the odds are currently in favor of Growth for all capitalization segments.
International: Global markets remain quite strong, but everything pales in comparison to China. China is once again trending upward at an annualized rate of more than 100%. We typically consider this a frothy reading because it is a rate that cannot be sustained indefinitely. That does not imply that a correction is imminent, as momentum can decrease with a sideways movement or a simple slowdown in acceleration.
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