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The Volatility Continues!

The volatility continues!  Equities fell significantly for the third day in six.  Friday’s catalyst was disappointing consumer confidence data, rallying dollar and a decline in oil.

Commenting upon the confidence data, consumer sentiment declined to a four month low because of weaker income expectations and a rebound in oil prices.

Bloomberg has an “Economic Surprise Index” which measures whether data beat or miss forecasts.  Data is missing expectations by the largest amount since 2009 when the county was in the depths of the Great Recession.

There is one notable and large exception; the employment data.  As widely discussed job creation has consistently surprised on the upside hence suggesting a change in monetary policy may come earlier than expected.

This potential change in monetary policy is a major reason why the dollar has staged a dramatic advance against most currencies, an advance that is threatening profit assumptions for the S & P 500

I don’t know why the vast majority of the data is missing expectations.  Are the proverbial models broken?  Are expectations to great?  With this written, in my 30 years of experience, I have never witnessed such a bifurcation between most data points and the grand Daddy of all statistics—the jobs data.

Speaking of statistics, Tuesday is the commencement of the two day FOMC meeting.  There are some aspects of the market, specifically the utilities, which are suggesting a change in monetary policy will occur in the intermediate future.  The utility index is down about 7.5% for the year and around 13% from its January 28 peak.  Wow!

The utility trade is very old and I believe most utilities are vastly over owned, the result of many searching for an income alternative.  What is disturbing, the utility average would have to decline another 20% in order to reach the previous “average” low yield for this sector.  Ouch!

As mentioned above, the dollar has been strong.  Will the small caps vastly outperform their large cap brethren?  The smaller capitalized issues primarily conduct their business in the US.  As noted many times, approximately 52% of the S & P 500 sales are from abroad.

The markets this week will also be faced with host of housing and manufacturing data.  How will the averages respond?

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.