Top Weekly Themes
- Small Cap Stocks Make a Move. Small cap stocks have struggled mightily versus their large cap counterparts in recent years. For example, over the past five years, the Russell 2000 small cap index has trailed the S&P 500 by over 30% on a cumulative basis. The story is largely the same over the past one, two, and three-year periods. Of late, however, performance fortunes appear to be shifting. Over the past three months, the Russell 2000 has outpaced the S&P 500 by almost 10%, and recently the Russell 2000 pushed above its downward sloping 200-day moving average (a key technical level watched by investors) while making a new post-virus high. Better stock performance has been supported in recent weeks by a notable pickup in earnings growth forecasts for small cap stocks relative to large. The trajectory of the economic recovery, which includes the need for additional fiscal stimulus, will be the deciding factor as to whether this trend continues. If it does, small caps have some catching up to do. As the S&P 500 touches an all-time high, the Russell 2000 remains 8% below its own high, which was made back in 2018.
- A Long Way to Go, but the Labor Market Continues to Heal. Both initial jobless claims and continuing unemployment claims fell last week in the United States. However, with 15.5 million people still claiming unemployment benefits versus 1.7 million a year ago, the employment picture is far from rosy. Financial markets have been remarkably resilient in the face of this severe job loss, and slow yet steady improvement may be enough to keep investors looking past the current labor market challenges. The trajectory of labor market improvement over the next few months will be very virus-dependent, in our view, so it is almost impossible to predict. One concern in the near-term is that the job market improvement emboldens policymakers in D.C. who do not want additional stimulus. It is easier to argue a “wait and see” approach when it comes to the appropriation of additional dollars when the unemployment rate is going down. Although we believe the labor market will continue to improve, additional stimulus is needed if we want to bridge the gap between now and a more normalized economy. Otherwise, we risk a severe drop in income and consumer spending. In our opinion, the stock market is not pricing in this possibility.
- What is a SPAC? If you watch business news television or read the Wall Street Journal, you have likely heard the term “SPAC” used in recent months. So, what is it, and what’s all the fuss about? SPAC stands for Special Purpose Acquisition Company. A SPAC is a company that is formed, with no commercial operations, for the sole purpose of raising capital via an IPO in order to then acquire an existing business. In other words, the SPAC is formed, it goes public, investors provide capital, then the SPAC has two years to invest in a business. Ultimately, the ticker symbol changes to reflect the company purchased, and investors in the SPAC hold shares of the acquired company. Investors are providing the SPAC capital “sight unseen”, as they do not know what company the SPAC will eventually purchase. It is a speculative investment (a “blank check” of sorts), usually based on the track record and investment expertise of those forming the SPAC. Richard Branson’s Virgin Galactic is a good example of a high-profile company that went public via a SPAC. There is nothing inherently wrong with SPACs and they have been around for decades. However, given the speculative nature of the investment, we often see a spike in SPACs when markets become a bit overzealous. Perhaps given today’s market backdrop (massive Fed liquidity and a desire for growth at any price), we should not be surprised to see increased interest in these vehicles. There have been 206 SPAC IPOs since 2018. That compares to 121 SPAC IPOs from 2009-2017. Time will tell whether this is a warning sign, but it’s probably not the sign of completely healthy investor behavior.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||1.9||(9.8)||0.3||14.1||35.3||2.56|
|Russell 1000 Growth||(0.4)||21.5||34.5||82.7||126.2||0.81|
|MSCI EM (Emerging Markets)||(0.9)||0.1||16.2||14.2||45.3||2.36*|
|Bloomberg Barclays US Aggregate||(0.9)||6.9||7.6||16.7||23.6||1.16|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||1.1||5.1||15.4||35.3||5.49|
|Bloomberg Barclays Municipal Bond||(0.2)||4.1||4.4||13.9||22.6||1.17|
|Bloomberg Barclays Global Aggregate x US (Country)||(0.9)||4.6||4.2||9.3||20.6||0.76|
|Crude Oil WTI (NYM $/bbl) Continuous||0.7||(30.8)||(26.0)||(13.5)||0.0||42.2|
|Natural Gas (NYM $/mmbtu) Continuous||0.8||(0.3)||1.6||(26.9)||(21.7)||2.2|
|Gold NYMEX Near Term ($/ozt)||(4.6)||28.8||30.3||52.0||75.4||1,956.7|
|Copper Cash Official LME ($/mt)||(1.1)||3.6||12.0||0.4||23.9||6,380.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.18||1.12||1.12||1.18||1.11||1.18|
|Japanese Yen per U.S. Dollar||105.53||108.68||106.64||109.15||124.45||106.89|
|U.S. Dollar per British Pounds||1.31||1.32||1.21||1.30||1.56||1.31|
Chart of the Week
- As the S&P 500 pushes back to old highs, it is worth considering the composition of the index.
- Interestingly, almost 60% of stocks within the index remain 10% or more away from their respective 1-year highs.
- The top 1% largest stocks in the S&P 500 now make up 23% of the index, and these are the companies that have been pushing the overall index higher.
- So, perhaps, stocks are better reflecting the underlying fundamental backdrop than most people believe, with almost 40% of stocks still more than 20% off their recent highs.
- We believe that aggressively chasing recent winners is a mistake, and maintaining diversified exposure to areas of the market that have yet to materially recover – mostly more cyclical and value-oriented stocks – will likely benefit performance in the coming 12-18 months.
The Pick Is In – Biden/Harris
Last week, former Vice President Joe Biden selected Sen. Kamala Harris as his running mate. Political judgments aside, this seems to be a choice that was unsurprising to the market, and we think a choice that is unlikely to cause any significant market reaction. Frankly, vice presidential candidates do not often have a major impact on presidential races, in our view. Perhaps, during this election, the impact is slightly elevated given that Biden may self-select as a one-term president and Harris would become the next presidential front-runner for the Democrats — but the effect isn’t likely to be significant. There will, of course, be market implications based on who wins the election(s), both presidential and congressional. A Democratic sweep would create certain obvious headwinds in areas like financials, energy, and healthcare (private insurers).
Interestingly, the single most important variable in terms of the ultimate winner of the presidential race might be income growth. As seen in the chart below, the relationship between disposable income growth and the share of the two-party vote received by past presidents is almost linear.
As a result, the administration has an incentive to compromise on a new fiscal stimulus package. Although the two sides remain far apart, the White House will likely look to strike a deal to ensure that incomes remain supported between now and the election. We believe a deal should be the base-case expectation, even if a compromise looks unlikely at this stage. The market has not priced in any risk of no additional stimulus, and would likely come under pressure if a deal is not reached over the next few weeks. Perhaps, that is precisely the motivation needed to create a sense of urgency among policymakers.