Lagging US Small Caps Show Cracks Are Forming Beneath the Rally

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Moomoo News Jun 17 05:31 · 4422 Views

US small cap stocks have underperformed larger peers as the Russell 2000 index diverged from the S&P 500 so far this month, reflecting growing concerns about the US economy as inflation remains sticky and the Fed keeps rates high. Bloomberg MLIV's Nour Al Ali joins "Bloomberg Markets Today" to discuss these themes.

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Transcript

  • 00:00 I think it's up to the part of how markets are looking
  • 00:03 at, you know, the latest updates from the Feds dot plot.
  • 00:06 I know overwhelmingly we had
  • 00:08 one cut priced in by the Fed, but I'm looking at swabs tied to meeting dates
  • 00:13 for the ECB or and the Fed as well.
  • 00:15 And I'm looking at about 46 basis points priced in for December.
  • 00:18 That's so that's
  • 00:19 almost two now basis, but 225 basis points for fully priced in for the Fed.
  • 00:25 The markets aren't buying that narrative just quite yet.
  • 00:28 And I think that's very interesting as the Fed continues to push back.
  • 00:31 Obviously you've had some speakers as well and FOMC members that say, well, look, I think we'll potentially get to
  • 00:37 cuts this year.
  • 00:38 So that's not completely out of the picture yet.
  • 00:41 I suppose now we're just waiting to see at which juncture will the feds say look to say, well, you know what, we're ready now for that second cut to come in and the markets will potentially rally even more on that, right.
  • 00:53 You've seen that stock market rally.
  • 00:55 It's been incredible.
  • 00:56 Kruti.
  • 00:56 Yeah, nor the the
  • 00:58 the connective tissue I think is so interesting between both sides of the Atlantic when we're talking about this bond sell off
  • 01:03 in in Europe or arguably what Michael Masika was saying is a a bit even into buns, but creating that widening what's the connective tissue into treasuries.
  • 01:10 Why does it feel like to you that the Fed and therefore the US bond markets kind of insulated where I say
  • 01:15 a year, two years ago maybe it wouldn't have been?
  • 01:18 Yeah, look, I mean, the the risk of contagion and that fear of where is that going to trickle to next is on everyone's mind this morning.
  • 01:26 We saw Friday really that French bonds really sell off buns rally in relative, you know, as in a haven demand, even the dollar.
  • 01:33 And I would say that you can look at FX as well.
  • 01:36 The Swiss franc also rising against the euro now at levels that make it a little bit uncomfortable for the SNB as they meet later this week as well.
  • 01:43 So there's a lot that's tied in there.
  • 01:45 And I think when you look at treasuries right now,
  • 01:47 really the dominant story there is that economic resilience out of the US economy, how the jobs market is still quite tight.
  • 01:55 You still have inflation, you know, it did ease again.
  • 01:58 So we did see that, you know that pairing of
  • 02:00 of price pressures.
  • 02:01 So I am expecting now to get a bit of a dynamic here where
  • 02:06 yields continue to track higher because we're still at a dynamic that's showing that resilience in the US economy that's pushing the Fed into a corner that says, well, look, we don't really need to cut yet.
  • 02:16 The economy hasn't given us incentive.
  • 02:18 And now I'm a little bit more concerned about the Fed being a little bit behind the curve
  • 02:23 and sending those yields a bit higher.
  • 02:25 And then that creates a dynamic where the dollar is much stronger than it should be.
  • 02:29 Stocks will then potentially start falling because markets will start panicking on the idea that the Fed is too late, economy starting to crack.
  • 02:37 And that's going to start showing up in balance sheets for companies.
  • 02:40 We're not there yet.
  • 02:41 I was about to say we are not there yet.
  • 02:43 And the problems are over here.
  • 02:45 So, so
  • 02:46 the US remains
  • 02:48 an area of safety
  • 02:50 versus Europe versus other parts of the world.
  • 02:53 Does that mean that the bar is even higher
  • 02:56 for, for,
  • 02:57 for for risk to emerge?
  • 02:59 I
  • 02:59 the, the risk needs to be even greater out of the United States for you to take your money out of it.
  • 03:03 It needs to be far greater in the United States to take money and put it into Europe.
  • 03:07 The, the bar seems to be getting higher and higher to take money out of that economy and put it to work
  • 03:12 in the rest of the world.
  • 03:13 You know, I absolutely agree with that guy.
  • 03:15 And if you look at the US
  • 03:16 stock market at the moment,
  • 03:19 I know we've talked about concentration risks in, in, you know, in the past, but
  • 03:22 right now you have, you know, the Magnificent 7, as we call them, really, really leading that rally.
  • 03:28 And not all of them, mind you, as well, you know, NVIDIA really taking that, you know, the, the gains of the, the wider stock market on his shoulders and really carrying through.
  • 03:37 So I'm going to ask you a question now.
  • 03:38 We're all very happy.
  • 03:39 Momentum is going there.
  • 03:41 But what happens when NVIDIA starts to disappoint?
  • 03:43 Is it just an I think,
  • 03:45 I think I saw a note from Tulsa slot, which I'm sure I can dig out and it'd be great Tulsa watching.
  • 03:48 You could briefing it to me right now because that would be helpful.
  • 03:51 It's something like 30% of the gains the the market cap gains in the S&P this year have been on on NVIDIA.
  • 03:57 So the arithmetic is fairly straightforward.
  • 03:58 If video rolls over,
  • 04:01 the SP's got a problem.
  • 04:02 I don't think it's rolling over just yet.
  • 04:03 No, I'm not, I'm not.
  • 04:04 But but you, you raise the question about what would happen if that were to to materialize.
  • 04:09 There's a lot of weight being carried on NVIDIA shoulders right now.
  • 04:12 There hasn't been the breadth that has emerged that there was the anticipation that would emerge.
  • 04:17 That hasn't come yet.
  • 04:18 Look at what is happening with small caps.
  • 04:20 Exactly.
  • 04:21 That's the message.
  • 04:21 The message out of what is happening with small caps is pretty clear right now and it's not telling you good things about what's happening with the underlying economy.
  • 04:27 Yeah, absolutely.
  • 04:28 I mean, if you take out those gains from
  • 04:30 the the Max 7 or NVIDIA, you'll see that actually the small caps index hasn't been doing very well.
  • 04:35 It's not been rising.
  • 04:36 So what does that give you about market breath?
  • 04:38 I think, you know, but but we go through these cycles, right, Right after the earnings cycle, we tend to go through these lows and it's, it's really cyclical, right?
  • 04:46 So we're very optimistic into earnings season.
  • 04:49 You know, earnings come and we think, Oh my God, look at these companies, they're doing so great.
  • 04:52 They're doing very well.
  • 04:53 We're going to carry those gains.
  • 04:55 NVIDIA comes really propelling those gains higher
  • 04:58 and then that kind of fades and you get those.
  • 05:00 That, you know, the feds speak saying, well, we've got to keep rates high for longer.
  • 05:03 The dollar is quite high.
  • 05:04 Yields are surging.
  • 05:05 So then companies that are small caps that aren't as, you know, as appealing to investors will start, you know, lagging in a in a sense because investors start thinking, well, you know,
  • 05:15 maybe I am too overweight on stocks.
  • 05:17 Maybe I need to find a way to do risk.
  • 05:20 And so it's,
  • 05:21 I think it's a really balance sheet, but you can't go away from the momentum
  • 05:24 into the summer.
  • 05:25 I think it's a summer of gains for stocks and potentially even yields higher.
  • 05:29 So quite interesting actually.