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“What could be worse than getting to the end of your life and realizing you hadn’t lived it” – Edward Albee

Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.  

S&P 500 futures are up 0.4% ahead of today’s Fed meeting while the Nasdaq rallies 0.6%, and the positive sentiment comes on the back of crude oil and treasury yields which are both lower. Gold is up over 1%, while Bitcoin falls modestly to just below $76K.

Asian stocks finally had a positive session, with the Nikkei rallying 0.7%, while Hong Kong rallied a more modest 0.2%. South Korean stocks led in the region, though, with the Kospi rising 1.4%. European stocks are also trading higher in early trading, with the STOXX 600 up 0.6%, while Germany lags with a gain of 0.3%. Industrial Production in Europe fell 0.1%, which was half the expected decline of 0.2%, while inflation in the UK and Italy both increased 0.5%. In other news, the EU could be spreading west as EU President von der Leyen proposed adding Canada as an associate member to the bloc.

We have a busy day ahead in the US, so where futures are now will have little bearing on where the market closes the day. Retail Sales and Import Prices both just hit the tape at 8:30. Retail Sales came in stronger than expected, while Import Prices at both the headline level and ex-petroleum topped expectations. Business Inventories and Homebuilder Sentiment will follow at 10 AM. We’ll also get Energy Inventories at 10:30. The big news of the day, though, will be the FOMC rate decision at 2 PM and subsequent press conference at 2:30.

While the S&P 500 has held up relatively well in recent weeks, small caps have borne the brunt of the selling. The Russell 2000 closed nearly 7% below its August high yesterday, well below the 50-day moving average and to the lowest levels since June, and the index is closer to its 200-DMA than it has been at any time since April.

While small caps struggle, mega-cap stocks, as measured by the S&P 100, remain above their 50-DMAs and are less than 3% below their recent highs. As shown below, the chart of the S&P 100 looks a lot more attractive from a technical perspective than the one above of the Russell 2000.

Two of the most cited reasons for the weakness in small caps relative to large caps have been interest rates and crude oil. In the charts below, we compare the relative strength of small caps to each.

Starting with the 10-year yield, looking at the last few months, there has been a clear inverse relationship between yields and small-cap relative performance. When the relative strength peaked in late June, it came just as yields began their new leg higher. Looking further back, though, the inverse relationship hasn’t been as obvious.

Moving on to crude oil, the inverse relationship has been stronger. When crude oil fell from April through July, small caps outperformed the megacaps, but just as crude oil prices bottomed out for the summer, the relative strength of small caps peaked.

Historically, the inverse relationship between small-cap relative strength vs. rates and crude oil hasn’t been set in stone, but with rates and crude oil rising in unison, the headwind for small caps has been too strong to ignore.

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