Here's a chart of the Wilshire 5000 which represents the total US stock market:
Small cap stocks were pummeled this week and finished a whopping 3.51% lower as measured by the Russell 2000. Here's a daily chart of the Russell as of Friday's close:
As I had commented yesterday on Twitter, the Russell tends to overshoot to the upside and undershoot to the downside because of the volatile nature of small cap stocks. However, as we look at sector ratio charts we can see a clear movement by investors into defensive issues. Here's a daily ratio chart of the Utilities Select Sector SPDR (XLU) and the Materials Select Sector SPDR (XLB). Utilities are seen as a safe haven as they are low "beta" (not volatile) and return higher dividends than the general market. Additionally, they weather market corrections fairly well. The Materials ETF is a bet on stronger economic fundamentals:
Here's another chart that measures the three components of inflation:
- the CPI (Consumer Price index)
- Compensation & Salaries
- Velocity of M2
Here's another way to analyse the data. This is called the "High Inflation Index" which tallies Year over Year CPI (Consumer Price Index), wage growth and M2 Money Velocity :
As stated above, the debate has raged for years regarding the extent to which the Federal Reserve's extraordinary liquidity programs have effected equity markets. And while there can be no denying that, in their efforts to spur a "wealth effect" there has been an artificial inflation to equity prices the question is, how much? And how much of the current disinflationary pressures we are dealing with will exacerbate a downturn in the stock market when it occurs? For occur it must! The market never goes straight up or down. And these five to six percent corrections hardly qualify as corrections.
In the meantime, we have an active economic calendar coming up next week culminating with the Monthly Employment report on Friday. Everyone will be watching this report as an indication that the much awaited turn around in poor economic data as a result of the inclement weather in January and February was an aberration. But to me, the ECB's announcement next Thursday may be more important. If they are unwilling to aggressively address the deflationary spiral they are clearly caught up in then inevitably it won't matter over the long haul how well our economic stats are in this country. We're all inter-connected and you can't have a healthy global economy with a major sector of that economy in the throes of deflation. It can be likened to trying to swim with a thirty pound weight around your waist!
Have a great week!