SMALL CAPS STRENGTHEN AS INVESTORS SIGNAL OPTIMISM IN U.S. ECONOMY

February 11, 2021

Strong performance for small caps: Two things really jump out on the chart. The first is how badly small caps underperformed large caps during 2018 and 2019, and the second is how much they've outperformed large caps over the last year. Small cap strength is usually a sign of optimism in the direction of the U.S. economy. That is because small cap stocks are more dependent on the U.S economy, compared to large cap stocks that do a lot of business overseas. 

Russell 2000 iShares (IWM)

The daily bars in the chart above show the Russell 2000 iShares (IWM) hitting a new record. Even more impressive is its rising relative strength. This means that small cap stocks have been rising faster than large caps. A longer-range look shows how impressive that performance has been on both an absolute and relative basis.

Super Bowl 55 recently finished, and as many of you might be aware, there is actually a Super Bowl indicator for equities. This is very likely merely statistical noise, but take a look at equity returns depending on which conference wins the Super Bowl:

- AFC wins --> 7.1%, 65% win-ratio
- NFC wins --> 10.2%, 79% win-ratio


Interestingly, NFC wins seem to be associated with better outcomes for stocks.  So, just to remind everyone in Super Bowl LV:

- Kansas City Chiefs = AFC
- Tampa Bay Buccaneers = NFC

Therefore, Tampa Bay’s win could possibly be a good sign for equities. Do we believe this is just chance?  Of course. It is rational to attribute this purely to statistical noise -- but then again, equity markets are mysterious, so maybe there is something to it?

Employment trends are looking up. The Conference Board’s Employment Trends Index (ETI) ticked up 0.7% in January, up for the ninth consecutive month, but still 10.0% below its year-ago level. Five of its eight components made positive contributions at the start of 2021, led by increased temporary help hiring. The latter suggests that firms do have staffing needs, but they are trying to hold down their labor costs in the face of some uncertainty about the virus and future fiscal stimulus.


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