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May 21, 2018

Will Small Caps Lead Large Caps Higher? Don’t Bank on It- May 21, 2018. | MoneyBeat | The Wall Street Journal

The Wall Street Journal
MoneyBeat

Will Small Caps Lead Large Caps Higher? Don’t Bank on It

By Ben Eisen
Morning MoneyBeat is the Journal’s pre-market primer. To receive the newsletter via email, click here.
Market Snap at 05/21/2018 07:47:35 AM ET
S&P 500 Futures 0.59%
2729
DJIA Futures 0.92%
24949
U.S. 10 Year -4/32
3.073%
WSJ Dollar Index 0.19%
87.32
Crude Oil 0.24%
$71.45
Gold -0.52%
$1284.60
Europe
Asia
FTSE 100 0.67%
Nikkei 225 0.31%
DAX -0.28%
Hang Seng 0.6%
CAC 40 0.5%
Shanghai 0.64%

Overnight Developments

  • Global stocks advanced to start the week as fears over a U.S.-China trade war eased. S&P 500 futures pointed to a 0.6% rise at the open.
  • The Stoxx Europe 600 gained 0.3%, though some European markets were closed for a holiday.
  • Earlier, Asian indexes broadly advanced, with Japan’s Nikkei closing up 0.3% and all of China’s benchmarks notching gains.
  • The Breakfast Briefing

    Shares of small companies are once again climbing to new highs, but that doesn't mean larger companies will follow suit.
    The Russell 2000 has gained 5.5% so far this month, well more than the S&P 500's 2.5% rise, the Dow industrials' 2.3% rise, and the Nasdaq Composite's 4.1% rise. The small-cap benchmark's jump last week took it to its first record since January, even as the other indexes sit well off their highs.
    Leadership among small caps tends to be viewed as bullish for larger companies, in part because because smaller firms are typically more sensitive to the U.S. economy. When accelerating growth lifts small caps, that should eventually lift shares of larger companies as well, the reasoning goes.
    But history suggests that's not always the case. During the handful of times in the last four decades when the Russell has been the first of the four major indexes to hit a 52-week high after all those indexes went at least 30 days without one, the record has been mixed, according to Jason Goepfert of Sundial Capital Research.
    Mr. Goepfert found that sometimes stock indexes have all subsequently drifted downward, while sometimes all have gained. There have been times when the Russell continued to lead and times when it fell behind. He wrote that it's hard to find much of any signal when small caps lead -- bullish or bearish.
    To be sure, the Russell's strength may very well precede a boost in the S&P 500 this time around. After all, the U.S. economy continues to strengthen and large corporations are reaping the benefits of the recent tax-code overhaul.
    But the data show investors shouldn't necessarily bank on it. Doug Ramsey of the Leuthold Group showed that by looking at times when the Russell 2000 has had a relative strength ratio above its 40-week moving average, a technical indicator that basically shows small caps have been leading the way over the intermediate term. That's happening right now.
    During such periods of strength, the S&P 500 has had annualized returns of 4.2%. That's well below the comparable 13% return when the Russell 2000's relative strength is below its 40-week moving average. In other words, strength in the Russell went alongside relative weakness in the S&P 500, and vice versa.
    How do you interpret the recent rise in small caps? Let the author know your thoughts at ben.eisen@wsj.com.

    Daily Factoid

    On this day in 1927, Charles Lindbergh completed the first transatlantic flight as he landed his airplane, The Spirit of St. Louis, in Paris, 33 1/2 hours after taking off from Roosevelt Field on New York’s Long Island.

    Key Events

    The Chicago Fed National Activity Index, out at 8:30 a.m. ET, is expected to show growth edged up in April.
    Atlanta Fed President Raphael Bostic is scheduled to speak at 12:15 p.m. ET, the Philadelphia Fed's Patrick Harker will speak at 2:15 p.m. ET, and Minneapolis Fed President Neel Kashkari is scheduled to talk at 5:30 p.m. ET.

    Stocks to Watch

    Starbucks—Up 0.6%: The coffee giant said it is creating an official policy that allows all guests to use its cafes, including its restrooms, whether or not they make a purchase.
    Campbell Soup—Down 1.4%: Campbell Chief Executive Denise Morrison abruptly left the company on Friday, raising questions about her push to transform the company into a fresh-food business in recent years.

    Number of the Day

    12%
    The amount Campbell Soup Co. shares fell on Friday, the stock's biggest one-day decline since 1999. The rout came after the company said its chief executive would step down and reported weaker-than-expected earnings.

    Must Reads

    Global investors looking to buy stakes in China’s most valuable private technology company, Ant Financial Services Group, have to agree not to invest in or raise their stakes in companies controlled by major rivals such as Tencent Holdings and JD.com. 
    The U.S. sent mixed signals over tariffs on Chinese imports, with Treasury Secretary Steven Mnuchin saying the U.S. was “putting the trade war on hold” but U.S. Trade Representative Robert Lighthizer saying that tariffs remained an important tool to “protect our technology.” The conflicting statements came a day after the two countries ended talks to try to reduce tensions.
    It’s mayhem in the mayonnaise aisle: Hellmann’s maker Unilever and Miracle Whip owner Kraft Heinz are cutting prices and slinging out new concoctions as they battle for supremacy. “Mayochup,” anyone? 
    Nicolás Maduro won re-election in a Venezuelan presidential election deemed illegitimate by the opposition and foreign governments, paving the way for heavier international sanctions amid widespread discontent over an economy in free fall.
    The Justice Department asked its internal watchdog to examine if there was any impropriety in the counterintelligence investigation of President Donald Trump’s 2016 campaign after Mr. Trump demanded that the department investigate the motives behind the inquiry.