Market Commentary: Calendar year 2008 is off to a dismal start. The first five trading days produced returns of -5.1% for the Dow Jones Industrial Average, -5.3% for the S&P 500, and -8.0% for both the Russell 2000 and the Nasdaq Composite. International benchmarks performed slightly better but were still decidedly down. The December employment reports only tended to throw fuel on the fire as the probability of a US economic recession increased.
The bond market is also factoring in a high probability of recession and the need for further Fed action. Traders now put the odds of further rate reductions at 100% for the end-of-January FOMC meeting. The 10-year Treasury yield closed today at 3.79%, its lowest level in nearly 46 months. The high-yield bond market continues to exhibit weakness.
Sectors: The classic defensive sectors of Utilities, Health Care, and Consumer Staples are showing strong relative strength although their absolute strength is questionable. They are joined by Energy on the positive side of the momentum ledger. The weak sectors of Financials, Consumer Discretionary, and Telecom continue to get weaker. Technology led the downside action this first week of 2008, dropping -9.0%.
Styles: The various style categories we track are typically much less volatile than sectors. That wasn’t the case this past week with Small Cap Value dropping -8.6%. Even the best performing styles for the week (Mega Caps, Large Cap Blend, and Large Cap Value) all managed to shed -5.0%. The negative action had little effect on the relative rankings with Large Cap Growth still on top.
International: The international equity markets have also been under selling pressure since the start of the year. On a relative basis, they have held up better than domestic markets. As a result, the USA slid toward the bottom of our global rankings.
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