There is a battle being waged over the best way to index fixed income. Supporters of alternative indexing claim that in this era of sovereign debt crises the traditional form of indexing gives too much weight to overly indebted countries, while those who favor the traditional cap weighted method claim that efficiencies in the market are strong enough to adjust to fundamental factors.
Like the S&P 500, traditional bond indexes like the Barclays Aggregate Bond Index are cap weighted. For stocks this means that the companies that have the highest market cap are given the biggest weights in the index. Bond indexes are based on the same metric, but use debt values instead of equity values. In an example of a corporate bond index, this results in the company that issues the most debt having the largest weight in the index. To avoid that, alternative indexes give weights to index members based on criteria like debt ratios, instead of market cap.
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Jan 27, 2012
U.S. stocks looked to extend upon Wednesday’s Bernanke rally yesterday, but just as the Dow Industrials hit a new multi-year high (going back to May 2008) the selling ensued. The reversal happened to take place right as the December new-home sales hit (specifics on that data beyond the click). I’m not convinced the sell off was a result of that data missing expectations; the new-home market is in such tatters, residential construction doesn’t affect GDP in any meaningful way no matter which direction it goes, but the two events did occur simultaneously.
The utility space was the only of the main sectors to gain ground for the session – benefiting from both the relatively high dividend yields the group provides and its traditional role of safety. Energy, telecoms and financials were the biggest losers.
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Jan 26, 2012
U.S. stocks erased early losses to post meaningful gains yesterday after Bernanke gave traders what they love to hear: The zero interest-rate policy (ZIRP) will remain in place until at least late 2014, which extends the policy from the previous pledge that had it running to mid-2013 and sets the stage for more QE. The rally puts the S&P 500 now within 3% of the three-year high that was hit on April 29.
This move by the FOMC was largely expected, as we’ve talked about for a few days now, but of course there’s always some level of doubt. Adding force to this pledge was that eleven of the 17 Federal Reserve officials that matter (five on the Board of Governors plus the 12 presidents of the regional banks) believe that fed funds should not be increased until 2014 – and just for entertainment value, four say it shouldn’t increase until 2015 with two saying not before 2016.
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Jan 25, 2012
U.S. stocks ended mixed again yesterday as the Dow Industrials and S&P 500 closed lower, while the NASDAQ Composite, mid and small cap stocks gained ground.
Even as the S&P 500 lost some ground, cyclical areas of the market such as consumer discretionary and tech were the day’s best performers. Telecoms, utilities and consumer staples remain out of favor early in 2012. The broad market did recover from earlier losses as traders wait for a big day (today) from the Fed. For the first time, members of the decision-making committee will make clear their individual forecasts of where fed funds will reside and this has people thinking it will set the stage for more easing.
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Jan 24, 2012
Most major U.S. stock indices ended flat on Monday after beginning the day nicely higher. For reference, the Dow Industrial Average was up 45 points out of the gate but ended down 12.
That early-morning gusto was basically on the heels of the European bourses, which ended their session higher across the board. But when Europe closed at 10.30 STL time and the Greek discussions were halted (there was speculation early in the day that EU officials and private investors were getting somewhere) domestic stocks lost steam and never really recovered.
All in all though, flat isn’t bad at all after the run we’ve been on, up 4.6% thus far for January. That makes for the best start since 1997.
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Jan 23, 2012
Most U.S. stock indices managed to extend their latest winning streak to four sessions on Friday, although it was a close one for the S&P 500 as it took a late-session rally just to post a fractional gain. Shares of IBM alone basically elevated the Dow after they killed it with their earnings results the night before (too bad we can’t say that for the rest of earnings season thus far).
Financials, utilities and consumer staples were the day’s top performers. Consumer discretionary, industrials and basic materials led the broad market lower.
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Jan 20, 2012
U.S. stocks extended the latest rally yesterday to three sessions, and up for 10 of the past 12. And to keep a running update here, this puts the S&P 500 just 3.6% below what was a three-high touched on April 29, 2011. At its worst (on October 3), the correction was 19% deep.
Consumer discretionary, industrials and financials led the rally. Utilities and basic materials ended down with health care, telecoms and consumer staples also underperforming.
Early 2012 trading is showing quite the euphoria over growth prospects and the European situation. Unfortunately, we’ve seen this ebb and flow of risk-off to risk-on and vice versa play out several times over the past couple of years now. But leading the pack YTD are basic materials (up 9.73% out of the gate), financials (up 8.09%) and industrials (up 7.44%). The sector rotation from the traditional areas of safety that ruled last year has been conspicuous. Those safety plays being utilities, consumer staples and health care – two of which are the worst-performing sectors thus far.
Let’s hope this euphoria that the economic environment has materially improved doesn’t roll over as it did in 2011 when traders fled the cyclicals they had flocked to for the relative safety of utilities and consumer staples. As you probably know, yours truly is doubtful that economic prospects will meld into the normal upswing in this period of high debt levels and private-sector deleveraging.
And it is indeed so typical that we’re approaching the multi-year high just as earnings are beginning to roll over again. But hey, we’ve always got more QE (and another LTRO coming in February from the ECB) to re-juice things if my sentiment is correct.
The government stuffed four major data releases in yesterday, so I’ll try to keep the commentary of each brief…you know what to do if you care to read on.
Acropolis Investment is a certified fiduciary and a member of the Centre for Fiduciary Excellence.