Why Large-Cap Stocks Can't Seem to Break
It might simply be because emerging markets won't let them.
-- Vladimir Nabokov
Make no mistake about it -- there has been a selective correction under way within markets for nearly two months now. High-beta momentum names have gotten wrecked, and small-cap averages have severely underperformed. Utilities have been abnormally strong, and the 2014 Dow Award-winning paper I coauthored shows that going back to 1926, their leadership tends to precede corrective junctures. In addition, long-duration Treasuries have been strongly outperforming, which in the third-place Wagner Award-winning paper I coauthored shows tends to occur before better environments for bonds relative to stocks. For many, it certainly has felt like a correction, despite headlines of the Dow Jones Industrial Average (INDEXDJX:.DJI) hitting new highs.
What gives? Why is it that large-cap stocks have been unable to break, particularly relative to small-cap equities? I believe the answer largely lies in a significant repricing of sentiment. Small-cap averages like the Russell 2000 (INDEXRUSSELL:RUT) tend to be highly dependent on domestic growth expectations. This is largely because smaller companies tend to have less exposure to global growth. On the other hand, large-cap multinational companies are unequivocally driven by global activity in a more pronounced way. Small caps are domestic, large caps are global.
The repricing of overly optimistic domestic hope is occurring at the same time that there's an overly pessimistic outlook for global markets. Take a look below at the price ratio of the iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) relative to the S&P 500 (INDEXSP:.INX). Consider this the most extreme way of looking at market expectations for global activity. A rising ratio means the numerator/EEM is outperforming (up more/down less) the denominator/S&P 500.
Perhaps large caps are unable to break because, since mid-March, emerging markets have been surprisingly strong and resilient. If a repricing out of the crisis that everyone was convinced of last year is now finally under way, then it stands to reason that large-cap stocks should outperform small caps purely because of the global factor. Should the selective correction be over, our ATAC models used for managing our absolute return and equity sector rotation mutual funds and separate accounts would likely begin to position more aggressively to take advantage of that repricing with further relative momentum.
Perhaps the ultimate correction is the upward correction in emerging markets.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter