Equities rallied as oil surged another 4% as it has been reported that Saudi Arabia and Russia has agreed on a production cap. The dollar also fell. Crude is now up about 10% for the year and over 60% from its mid-February lows.
Perhaps the three greatest surprises of 2016 is the drop in the dollar, the rally in crude and the “unloved” issues grossly outperforming large capitalized momentum growth.
Is this the start of a trend or is this all just a one off event? To write the obvious, it depends upon economic growth, earnings and interest rates.
Several weeks ago I quoted a Goldman Sach’s report stating small cap companies are 40% below their mean as compared to the S & P. Historically they are about 40% more expensive. Similarly, value is at the “cheapest” relative value as compared to growth since at least 1980, also according to a dated Goldman study.
In my view there are a host of potential reasons for today’s environment including the proliferation of ETFs where there are now more ETFs than listed stocks, High Frequency Trading, regulatory pressures that discourage ownership of the smaller capitalized issues and momentum, a trading strategy stating the current trend will last forever.
However I believe monies ultimately gravitate to the sectors that potentially offer the greatest potential rewards and the last amount of risk. If Goldman’s analysis is correct, this environment should be in the small cap and value entities.
Value is rallying. Is small cap next? As noted above it depends upon earnings, interest rates and economic activity, all three of which I think are fully discounted in the negative sense.
Today March retail sales are posted as is the PPI. Also released is the Beige Book or the statistical compilation utilized at the upcoming Fed meeting. All can influence trading.
Last night the foreign markets were up. London was up 1.49%, Paris up 2.55% and Frankfurt up 2.26%. China was up 1.39%, Japan up 2.84% and Hang Sang up 3.19%.
The Dow should open moderately higher on Chinese trade data suggesting the world’s second largest economy is stabilizing and better than expected earnings for money center bank. Oil is down about 1% ahead of key inventory data released at 10:30. The 10-year is off 3/32 to yield 1.79%.