A healthy unwinding? Small caps outperform in bounce-back rally
Main indexes green; Dow out front up ~0.9%
Small cap index Russell 2000 up >2% out-performing large caps
Industrials lead S&P 500 sector gainers; utilities off most
Dollar edges down; gold, bitcoin both down >1%; crude rises
U.S. 10-Year Treasury yield dips to ~4.26%
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A HEALTHY UNWINDING? SMALL CAPS OUTPERFORM IN BOUNCE-BACK RALLY
While Wall Street's three main indexes are bouncing back from Wednesday's sell-off, bruised investors are favoring small caps pushing the Russell 2000 .RUT up 2.2% vs the S&P 500's .SPX 0.6% gain and the blue chip Dow's .DJI 0.9% rise.
Before the depth of Wednesday's sell-off was apparent, Morningstar Wealth's chief investment officer for the Americas, Philip Straehl, was out with a research note earlier that day noting that large cap stocks appeared "vulnerable to changes in market sentiment."
Catching up with Straehl on the phone on Thursday, he went into the logic of favoring a broadening of the market beyond large-cap tech and momentum stocks.
The CIO notes that the top 3 stocks account for 18% of the overall market cap and the top 10 stocks account for a third of overall market cap.
"Broad equity markets and large caps in particular, look expensive and it's been an equity market that's fairly concentrated and increasingly has been dominated by momentum factors," Straehl said.
"US equity markets, high yield, and credit markets, all three, today trade in the top decile relative to their history in terms of valuation. They're expensive," he said.
"Today's market valuation is at a much higher level than it was at the beginning of the last three rate cutting cycles," Straehl added.
"From a macro standpoint, the market is pricing in a pretty rosy outcome when it comes to the economic development. Markets are priced for a soft landing. But in our experience, the path of normalization is rarely a straight line."
So the money manager notes that unwinding the concentrated trade "is healthy for the structure of the market."
To be sure, if the next big earnings reports impress investors more than say Alphabet GOOGL.O did this week, "that can provide more of a positive impulse for big tech again over the next few weeks," Straehl said.
But he argued that some trends that had started to work over the last couple of weeks, "whether it's the small cap trade, whether it's more defensive sectors like REITs, for example - these areas of the market have the ability to continue to do well."
(Sinéad Carew)
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FOR THURSDAY'S EARLIER LIVE MARKETS POSTS:
ARGUING AGAINST A CORRECTION AND FOR SMALL CAPS - CLICK HERE
SCARY HEADLINES AND RED DAYS MAY HAPPEN, BUT CAN STILL HAVE A SOLID SECOND HALF - CLICK HERE
CHEW ON THAT, POWELL: GDP, DURABLE GOODS, JOBLESS CLAIMS - CLICK HERE
NASDAQ DOWN, S&P 500 DIPS, DOW GAINS IN EARLY TRADE - CLICK HERE
S&P 500 INDEX: AFTER SHARP SLIDE, SEEKING TO STABILIZE - CLICK HERE
WHAT'S UP WITH THE YEN? - CLICK HERE
WHY UBS LIKES BANKS - CLICK HERE
STOXX 600 DROPS TO 12-WEEK LOW AS EARNINGS FAIL TO IMPRESS - CLICK HERE
GLOBAL EQUITY SLUMP SET TO GATHER MOMENTUM IN EUROPE - CLICK HERE
STOCK ROUT SPREADS BEYOND TECH - CLICK HERE
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