Market Commentary: It is always amazing that something so universally predicted can cause so much reaction when it happens. Today’s FOMC decision to cut interest rates by another 50 basis points is a case in point. The immediate reaction appeared to be bullish, but we have all been through these enough times to know that the initial reaction can reverse itself a time or two before a sustainable trend develops. With the Fed uncertainty now removed, the market is free to determine what it wants to focus on next – the bearish view associated with an economic slowdown, or the bullish view of the ensuing recovery. Meanwhile, volatility remains quite high even though it is down from the wild action of the previous week.
As expected, the panic extremes in the Treasury markets have now subsided. Last week’s historically low 3.3% 10-year Treasury yield is back up to 3.7%. A week ago, the 10-year Treasury was yielding about 0.5% less than the Fed funds rate, while today it is yielding about 0.7% more. As a result, most bond funds lost some value this week. Some of the exceptions include the high-yield and floating-rate funds. These segments were hit hard by subprime concerns but started to show signs of improvement this week. However, it is still too early to start aggressively building new positions.
Sectors: The defensive sectors remain near the top of our rankings, although there are signs that things could be changing. There was significant movement among the sectors this week. Just like every major market move has some counter-trend moves, every major sector rotation has some counter-rotation moves. In other words, we need more data to determine if this change is lasting. If it is, it could be an early signal that the correction has run its course for now. The Materials sector has taken over the top spot, and believe it or not, the Financial sector is now #3. Technology has joined Telecom at the bottom of the list.
Styles: Style rotation is evident this week also. Value has grabbed the top three spots in our style rankings, something that hasn’t happened in more than a year. In the “some things never seem to change” department, the Micro-Cap stocks still occupy the bottom rung of our style rankings.
International: There have been significant shifts in our global rankings as well. Latin America recaptured the top spot after a brief one-week slip to #2. Canada and Pacific ex-Japan made great strides to move into the next two slots. This change happened mostly at the expense of the European Union, which tumbled in our rankings. However, day-to-day global market leadership remains quite fluid. Don’t read too much into the one-week changes because they can revert back just as quickly.
As expected, the panic extremes in the Treasury markets have now subsided. Last week’s historically low 3.3% 10-year Treasury yield is back up to 3.7%. A week ago, the 10-year Treasury was yielding about 0.5% less than the Fed funds rate, while today it is yielding about 0.7% more. As a result, most bond funds lost some value this week. Some of the exceptions include the high-yield and floating-rate funds. These segments were hit hard by subprime concerns but started to show signs of improvement this week. However, it is still too early to start aggressively building new positions.
Sectors: The defensive sectors remain near the top of our rankings, although there are signs that things could be changing. There was significant movement among the sectors this week. Just like every major market move has some counter-trend moves, every major sector rotation has some counter-rotation moves. In other words, we need more data to determine if this change is lasting. If it is, it could be an early signal that the correction has run its course for now. The Materials sector has taken over the top spot, and believe it or not, the Financial sector is now #3. Technology has joined Telecom at the bottom of the list.
Styles: Style rotation is evident this week also. Value has grabbed the top three spots in our style rankings, something that hasn’t happened in more than a year. In the “some things never seem to change” department, the Micro-Cap stocks still occupy the bottom rung of our style rankings.
International: There have been significant shifts in our global rankings as well. Latin America recaptured the top spot after a brief one-week slip to #2. Canada and Pacific ex-Japan made great strides to move into the next two slots. This change happened mostly at the expense of the European Union, which tumbled in our rankings. However, day-to-day global market leadership remains quite fluid. Don’t read too much into the one-week changes because they can revert back just as quickly.
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