A theme that I have pursued throughout 2016 is a rotation from mega capitalized growth entities into the smaller caps and value shares. Some of the comments I received about this potential rotation could not be printed, but were generally along line that if the mega caps were down 10%, the small caps would be down 20%.
The last 30 days the rotation has commenced. The must owned “FANG” stocks that represented the entire gain for the S & P 500 during 2015 are down about 8%. The Russell 2000 is up about 11.7% for the same period.
There are a lot of reasons for this rotation, many of which have been discussed including the impact of higher interest rates, onerous regulations, massive ownership because of ETFs and the lack of ownership/valuation of the value/small caps.
During the last 16-20 months the unwinding of the interdependent/multipolar economy has also been discussed stating the environment is potentially conducive for Main Street to outperform Wall Street especially if there is a change in power at the executive branch which sets the tone for the regulatory bodies.
I think the trend of the last 30 days will continue. The Trump administration is nationalistic versus globalist. The odds are high there will be a roll back of some of the more onerous regulations that have stifled small business and small business creation. Moreover I think monetary velocity will accelerate, an acceleration that will increase economic activity and interest rates, all which will benefit the small companies at the expense of the mega caps.
Speaking of interest rates, the past 30 days in the bond market have been the worst since 1990. Will Treasury yields continue to rise, achieving the central tendency of the Federal Reserve which is a 3% yield of the 10-year in 2017 and 4% in yield by 2018?
Today’s release of November’s jobless data can offer some insight. Consensus is expecting a 4.9% unemployment rate, a 180k and 170k increase in nonfarm and private sector payrolls respectively, a 0.2% increase in average hurly earrings, a 34.4 hour work week and a 62.8% labor participation rate.
Commenting upon yesterday’s activity, the NASDAQ fell almost 1.5% while the Dow was virtually unchanged because of oil and financials. The 10 and 30-year Treasury were off 5/8 and 1 ½ points respectively.
Last night the foreign markets were down. London was down 0.83%, Paris down 1.31% and Frankfurt down 1.05%. China was down 0.90%, Japan down 0.47% and Hang Sang down 1.37%.
The Dow should open nominally lower but this could change radically given the significance of the 8:30 data. And then there is the Italian referendum. The 10-year is up 6/32 to yield 2.43%.
