The big keep getting bigger, until they don’t. Since nothing grows to the moon, in the markets there always comes a time when momentum reverses sharply, and the unloved become loved and the loved become hated. In the dot-com crash, the signs of an impending recession resulted in high flying dot-com stocks getting walloped, many losing 90% or more of their value in a year, as smaller businesses and companies held their own. The reversal of fortunes not only applied to the different sectors within the US markets, but also to global markets. Emerging market stocks took off, and outperformed their developed market counterparts for close to a decade that followed.
The most recent inflation data today resulted in small cap stocks, as measured by the Russell 2000 index, severely outperforming large cap tech stocks as measured by the S&P 500 and NASDAQ. At the end of the day, the small-cap stock Russell 2000 index and an ETF that tracks is (IWM) were up more than 3.5% while the Nasdaq and the QQQ ETF were down over 2.0% (Source: Bloomberg). An almost 6% outperformance in one day, in opposite directions. Something we have not seen in a while. An anomaly or a canary in the coalmine?
The full note on this important topic can be downloaded at this link: LTA Thinking – David Vs. Goliath – Why Small Caps Killed Large Caps As Inflation (Barely) Softened