What Does The Breakdown In Small-Caps Suggest? - Knowledge Leaders Capital

What Does The Breakdown In Small-Caps Suggest?

July 16, 2014

By Knowledge Leaders Team in Uncategorized

Beginning in March of this year, the relative performance of small cap stocks began to break down. After a brief recovery from June to July, small caps have recently experienced another leg down and are making new relative lows for the year.

What effects might we expect from this underperformance of small cap stocks? While there are many, there are two we would like to highlight:

1) It would seem to suggest a stronger Yen, and

2) It would seem to suggest the continued relative outperformance of counter-cyclical stocks (companies from the utility, telecom, health care and consumer staple companies).

In the first chart, we overlay the relative performance of small-caps vs. the S&P 500 and the Yen/USD exchange rate. Perhaps the Yen reverts into a stronger trend rising into the 90s vs. the USD.

In the second chart, we overlay the relative performance of the S&P 500 vs. the S&P 600 compared the relative outperformance of counter-cyclical sectors to cyclicals sectors in the MSCI World index. Because of the 92% correlation between these variables, the new leg down in small-caps potentially telegraphs the continued outperformance of counter-cyclical sectors.

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