July Charts of Interest: The Small-Cap Stock Resurgence

The Russell 2000 index’s seven-day run through July 17, 2024, represented the largest outperformance since at least 1986, according to Dow Jones Market Data. The big jump has led various pundits to ask whether small-cap stocks are poised to make a resurgence against their larger-cap brethren.

A combination of factors is being credited for giving small-cap stocks life. They include raised expectations for an interest rate cut announcement following the Federal Open Market Committee’s (FOMC) September meeting, a lighter regulatory environment should former President Trump win the presidential election in November and strong earnings growth by small-cap stocks. The LSEG I/B/E/S blended consensus earnings estimate calls for Russell 2000 companies to grow 17.5% in the second quarter of 2024.

Source: AAII and QuoteMedia. Data as of 7/25/2024.

Value stocks also experienced a resurgence of their own. “The Russell 1000 Value index, meanwhile, notched its biggest lead over its growth-stock counterpart since April 2001,” added The Wall Street Journal.

Source: AAII and QuoteMedia. Data as of 7/25/2024.

Most Large-Cap Stocks Are Lagging the S&P 500

I’ve been writing about the S&P 500 index’s high level of concentration for many months. A side effect of it is a tougher environment for stock pickers. “Only 21.0% of S&P 500 stocks have outperformed the index in 2024, on pace for the fewest on record,” wrote Ed Clissold, CFA, of Ned Davis Research earlier this month.

As you can see below, the majority of stocks in most sectors are underperforming.

A Sign That Performance Is Relative

Though most large-cap stocks are trailing the S&P 500, Charles Schwab chief investment strategist Liz Ann Sonders points out that most remain in bullish territory. About 75% of S&P 500 stocks were trading above their 200-day moving averages as of July 20.

Inflation Boosts Hope for an Interest Rate Cut

The consumer price index (CPI) declined 0.1% on a seasonally adjusted basis in June. It was the CPI’s first monthly decline since May 2020. A deceleration in shelter costs helped. While this is a good sign on the inflation front, one monthly reading does not make a trend.

Source: The U.S. Department of Labor’s Bureau of Labor Statistics.

Bond Defaults Are Low

Private equity firm KKR & Co. Inc. believes that high yield spreads are pricing in about a 2% default rate today, compared to 3% at the beginning of 2024 and a historical average of 5.7%. This optimism helps to explain why investors are rotating into the riskier parts of the bond market in search of comparatively higher yields. Higher yields imply greater risk, so tread carefully.

The Bond Market Likes Interest Rate Cuts

It should come as no surprise that the bond markets tend to do well once the Federal Reserve starts cutting interest rates. The chart below from Charlie Bilello shows their historical performance. Gains have varied in terms of magnitude, but bonds have risen in value during each of the last nine interest rate cut cycles.

The Box Office Is Still Not Booming

Even with ticket prices at high levels, movie theater revenues remain well below pre-pandemic levels, as Chartr shows. One reason is that going out to a movie is expensive. My wife and I made good use of our AMC Stubs membership for many years prior to 2020. Now we are very selective about what movies we watch on the big screen.

Plus, let’s face it, watching movies at home means no interruptions from other people’s cellphones and conversations. Manners, people.

Related to this is the performance of AMC Entertainment Holdings Inc. (AMC). It has fallen significantly since its meme stock bubble days.

Source: AAII and QuoteMedia. Data as of 7/25/2024.