The Next Big Thing in the Market!
Had the market not rallied for 2-hours after Wednesday’s Fed rate hike announcement, it would have been a particularly boring week. After all, the short-lived celebration was rooted in the stance that the Fed had moderated its approach more than expected, though, that notwithstanding, after Wednesday’s momentum, movement dried up once again.
Month-to-date, the market has failed in producing significant movement after its 2 rally attempts. As a result, we haven’t seen a mass flight, but with that, the market’s inability to produce strong momentum needs to be a cause for worry. On the flip side, bears have shown an even greater inability to get things done, even when opportunity’s been laid out before them on a silver platter. The bears have become more and more vocal about the negative figures that have been piling up, though price movement has refused to cooperate to their discontent. It could be that we’re seeing micro-cracks on a market level, though the strategy of fleeing to more defensive positions has proven itself to be very costly, to say the least, with little payoff in the current market.
In the vacuum left in between now and the kickoff of the Q1 earnings season in the second week of April, Washington D.C. is likely to surface as a significant topic of interest for markets this coming week. The U.S. House of Representatives is expected to vote on an Obamacare replacement bill this Thursday, and if it passes, investors are expected to see in that another step bringing Congress closer to tax reform, despite the fact that any legislation will need to pass muster in the U.S. Senate – the upper chamber – as well.
In the event the healthcare bill does not pass on Thursday, tax reform is likely to be pushed off until next year, an event that has yet to be priced into the stock market.
The U.S. central bank, in keeping with expectations, hiked rates this past Wednesday by a quarter of a percentage point, though offered no hint at a desire to accelerate its rate hike pace. All-in-all, a monetary policy that’s less aggressive is likely to aid small-cap stocks which tend to take a bigger hit when financing costs grow as a result of higher interest rates.
Small-cap stocks have rallied since the November 8th elections which had placed Donald Trump in the Oval Office, investors betting that Trump’s plans to lower regulation and cut taxes would especially help small stocks.
When all is said and done, though, that tack hasn’t produced especially good results year-to-date, small-cap stocks lagging behind the S&P 500. Small-caps’ short-term performance hinges on how much the earnings picture improves, though until now, the earnings of small companies still haven’t bounced back to the same degree as seen in larger companies.
At present, small stocks are expensive, their multipliers high. Investors’ approach is now “prove us wrong,” demanding that small-caps pick up their earnings pace to close the gap given current stretched valuations.
Q4 earnings for small-caps recorded year-over-year declines of 1%, while the earnings of S&P 500 firms soared 7.8% year-over-year. Analysts expect to see earnings growth on the part of small-caps in Q1 2017, though the pace of their growth is still expected to come out beneath that of the S&P 500.
The S&P 600, which tracks small-cap stocks, has recorded gains of just 1.4% year-to-date, significantly beneath the clip of the gains seen on the S&P 500, which tracks the market stocks with the largest capitalizations.
With a 12-month forward earnings multiplier of 20.4, the S&P 600 seems expensive compared to the index’s historical average of 17. The S&P 500, for the sake of comparison, is traded at a 12-month forward multiplier of 17.8, also above its long-term average.
The Russell 2000, likewise a popular small-caps index, is traded at a 12-month forward PE of 25.4, above its 10-year average of 20.7.
Economic growth and the rate hike pace are on track to be the two keys to movement in small caps. It’s possible that small-cap stocks have more room to climb in the short-run, especially if we see a positive earnings surprise, though by the same token, pricey valuations still serve to their detriment. On the flip side, rate hikes in general tend to boost up the American dollar, which could have outsized negative consequences on large international companies, the strong dollar hurting overseas earnings which are translated into fewer dollars on the local level. In contrast, most of the revenues taken in by small companies take the form of American dollars, currency strengthening adding to the buying power accrued from bottom line earnings.
In addition, investors are concerned that the Trump administration tax cut is likely to materialize in only a few months’ time or perhaps even as far along as 2018. Small-cap companies usually pay higher taxes, and resultantly, the behavior of small cap stocks can be seen as a gauge of investor confidence in the tax cuts coming to fruition.
This coming week, the Economic Diary will have slim pickings, the main figures being real estate figures on Wednesday and Thursday, and durable goods orders on Friday. More than 6 senior bankers from the Fed will be speaking this week, including Chairwoman Janet Yellen, who will be speaking at a Fed conference on Thursday.
We’re now entering a period that’s seasonally not to the bulls’ advantage, and there are no earnings report catalysts on the immediate horizon. The next big market movement will presumably crop out of a topic related to a Trump policy, i.e. the extent to which it progresses or stalls. Until now, it’s been a lot of rhetoric, and at a certain point the market’s going to want to see progress on the ground; that will be the point at which the market responds. Though at a weakened state, the market is still on an uptrend.
Weekly Summary: Stocks traded flat, with a slight tendency towards gains. The Dow Jones ended unchanged. The S&P 500 recorded light gains of 0.2%, the NASDAQ succeeding in rising 0.7%.
Have a great trading week!
|Wednesday||9:00||FHFA Housing Price Index||–||Medium|
|Wednesday||10:00||Existing Home Sales||5.54M||Medium|
|Thursday||8:30||New Home Sales||560K||Medium|
|GIS||General Mills, Inc.||AM||Tuesday|
|LUX||Luxottica Group S.p.A.||AM||Tuesday|
|FIVE||Five Below, Inc.||PM||Wednesday|
|CAG||Conagra Brands, Inc.||AM||Thursday|
|CMC||Commercial Metals Company||AM||Thursday|
|MU||Micron Technology, Inc.||PM||Thursday|
Today’s Picks – Day Trading!
New York Strategy Swing
Today’s Picks – Swing “New-York Strategy
No.1 – ACIW
|Company Name||ACI Worldwide|
|Sector||Technology | Technical & System Software|