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“Men in general judge more from appearances than from reality. All men have eyes, but few have the gift of penetration.” ― Niccolo Machiavelli
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If you were to apply the quote above to the markets, it would be that you should never invest based on the headlines.
It was nice while it lasted, but the Fed blackout will come to an end this afternoon when the FOMC announces its latest decision on interest rates and Powell holds a 2:30 PM Eastern press conference. There’s a bit of a positive tone in the markets ahead of the announcement, but that will all change later on. The ADP Employment report crushed estimates surpassing forecasts by more than 100K, and while it hasn’t been particularly reliable in forecasting the Non-Farm Payrolls report, the strong reading suggests that the labor market is holding up even after yesterday’s weaker JOLTS report. We’ll have to wait and see jobless claims and Non-Farm Payrolls later this week to get a better read on that sector. As far as the rest of the day is concerned, we still have ISM Services at 10 AM.
As large caps have carried the lion’s share of the weight in market performance this year, the performance gap between the Nasdaq 100 and the Russell 2000 has really widened. Year to date, the Nasdaq 100 has rallied by 19.9% while the Russell 2000 has declined nearly 2%, and over the last six months, the gap has been similar at 19.8%. The chart below shows the rolling six-month performance spread between the two indices, and while the spread has spiked in the last few months, it’s still lower than it was at post-COVID extremes in the fall of 2021 and the middle of 2020. At the other extreme, the peak period of outperformance for the Russell 2000 was in Mach 2021 when US consumers were flush with stimulus cash. Over the last 13 years, though, the performance gap has been in the Nasdaq 100’s favor as the spread has been positive 65% of the time since 2010.
With the gap in performance favoring the Nasdaq 100 nearly two-thirds of the time over the last 13 years, its relative strength versus the Russell 2000 has, up until recent years, been in a consistent uptrend. After going parabolic in the early COVID days, relative strength has been in a sideways range for three years now. Tighter credit conditions from the regional banking crisis this year have recently helped buoy the performance of large caps. Now, with the Fed on tap this afternoon, will Powell continue the hawkish tone and keep a tight grip on the credit spigot for smaller companies, or will he take a softer tone and help grease the skids?
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