Market Commentary: The four-week selling spree accelerated last week, hitting its nadir mid-day on Thursday. Thursday’s dramatic turn-around seems to have put a short-term bottom in place for now, boosted by the Fed’s decision to cut the discount rate by 50 basis points on Friday. Markets have been staging a relief rally – relieved that the Fed is paying attention. Perhaps we may be able to call it something stronger than a relief rally in the near future, but for now, that is all that it is.
While the Fed action was well received by the equity markets, the credit markets (which the action was “supposed” to address) remain in a quagmire. There are still few buyers for non-government debt instruments, and on Monday, the demand for short-term Treasuries was so great the yield dropped below 2.5%. It has now returned to around 3.5%, the same place it was last Thursday.
Sectors: All sectors remain in intermediate-term downtrends while trying desperately to rebound from last week’s turmoil. In what is considered typical action, the sectors that were beaten down the most have bounced the highest, so far. Needless to say, the Financial sector has been at the forefront of this action. The relative volatility in the Financial sector has reached historic levels, with prices jumping more than 10% from Thursday’s mid-day low to Friday’s opening high. Without any follow through on this brief surge, our outlook remains negative on Financials. The Materials sector also sold-off sharply last week and staged a rally of nearly 10% to coincide with the move in the Financial sector. The major difference is that Materials has now surpassed that Friday morning level, providing it with better odds for a successful recovery, although that is not a given at this juncture.
Styles: High levels of volatility have also been the norm among the various styles lately, although nothing quite as extreme as we have seen in the sectors. Growth still has the edge over Value for now, but that could change in a heartbeat.
While the Fed action was well received by the equity markets, the credit markets (which the action was “supposed” to address) remain in a quagmire. There are still few buyers for non-government debt instruments, and on Monday, the demand for short-term Treasuries was so great the yield dropped below 2.5%. It has now returned to around 3.5%, the same place it was last Thursday.
Sectors: All sectors remain in intermediate-term downtrends while trying desperately to rebound from last week’s turmoil. In what is considered typical action, the sectors that were beaten down the most have bounced the highest, so far. Needless to say, the Financial sector has been at the forefront of this action. The relative volatility in the Financial sector has reached historic levels, with prices jumping more than 10% from Thursday’s mid-day low to Friday’s opening high. Without any follow through on this brief surge, our outlook remains negative on Financials. The Materials sector also sold-off sharply last week and staged a rally of nearly 10% to coincide with the move in the Financial sector. The major difference is that Materials has now surpassed that Friday morning level, providing it with better odds for a successful recovery, although that is not a given at this juncture.
Styles: High levels of volatility have also been the norm among the various styles lately, although nothing quite as extreme as we have seen in the sectors. Growth still has the edge over Value for now, but that could change in a heartbeat.
International: Correlation increases during market declines, and that was clearly evident this past week. Global markets sold-off sharply in the face of what is viewed mostly as a U.S. problem, indicating that global markets are linked more than ever. Emerging equity markets underwent the steepest declines, especially Latin America. Believe it or not, our domestic markets have actually held up the best, vaulting them to near the top of our global rankings over the past few weeks.
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