About a year ago oil, value and small cap stocks were plunging. The prevailing narrative was that these issues had absolutely no upside, no access to capital and will be forever forgotten because of HFTs and ETFs.
Fast forward one year, oil has more than doubled, energy debt has over a 100% total return, value and small cap issues have greatly outperformed, as the latter is up about 22% after plunging more than 26% from their 2015 highs from January 1 February 12, 2016 according to the WSJ.
There are a number of reasons for this great over performance. Some had to do with extreme undervalueness. Last year around this time Goldman stated small caps and value shares were the most undervalued and least owned as compared to their large capitalized brethren since 1980.
I also believe the unexpected geopolitical change have also had a large impact. It was evident the Democratic party was entirely convinced that it will win the White House, the Senate and make huge inroads into the House. In 2014 the Democratic leadership changed Congressional rules that ended the Filibuster. I will argue such moves were either out of arrogance or stupidity. I do not know what is worse.
Will the Republicans use these Democratic sponsored rule changes against the Democratic Party? I naively hope not but…
Regardless, there will be at least a moratorium of new regulations with many hoping of a potential roll back of the more onerous rules that had strangled all but the largest capitalized entities.
Continuing with this theme, Globalism has died an incredible sudden and ugly death not only in the US but also in Europe. China, Russia, Iran, North Korea are acting extremely belligerent. This change from a globalist to a nationalist view is more beneficial to Main Street as opposed to Wall Street.
As noted above, small cap issues are retracing their early 2016 plunge. I think this advance is in its nascent stage given the entire change in the geopolitical environment. Change is the only constant and more things change the more things remain the same.
Commenting about yesterday’s market activity, Treasuries rose in price amid uncertainty over Brexit and security concerns in both South Korea and Turkey. Oil fell for the first time in four days. Equities were nominally lower.
What will happen today?
Last night the foreign markets were mixed. London was up 0.46%, Paris up 0.14% and Frankfurt up 0.21%. China was down 0.30%, Japan down 0.79% and Hang Sang up 0.83%.
The Dow should open quiet. The 10-year is off 6/32 to yield 2.39%.
