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Mar 12, 2019

Markets | Small Stocks’ Slide Prompts Concern

The Wall Street Journal.
Markets Bull logo.
Hello. Amrith Ramkumar here breaking down the latest markets headlines.
Futures are mixed following a Monday surge in tech stocks that lifted the S&P 500 to its best day since January. We're awaiting February inflation data after upbeat January retail sales yesterday signaled positive momentum for the U.S. economy. 
Before we find out if stocks can start a new winning streak, our Corrie Driebusch looks at the recent pullback in small-cap stocks and what it could portend for the broader market. 

Overnight Developments


Recent Lag in Small Caps Stokes Growth Worries

Some worry the slide could signal turbulence ahead for the broader market. 
It’s been a rough start to March for shares of small companies.
The Russell 2000 posted its worst week of 2019 last week, falling nearly twice as much as the S&P 500. The small-cap benchmark’s 2% drop on Wednesday was its worst one-day performance since December.
That worries some analysts, as smaller companies tend to derive more of their revenues domestically and their swings often track investor confidence in the U.S. economy. The Russell 2000 remains up 15% in 2019 following a 1.8% rebound Monday, but if investors keep rushing out of smaller stocks, that could be a warning for the broader market, these analysts say.
One reason is that the fates of small-cap companies are closely intertwined with sentiment toward economic growth and interest rates, which can weigh on profits by pushing up borrowing costs when they rise.
Although the Federal Reserve has signaled patience with rates, the outlook for the U.S. economy appears less certain following a stretch of mixed data, and some analysts say they want to see a resolution to the U.S.-China trade fight before favoring small caps again.
The recent underperformance of small stocks marks a reversal after they led the broader market for much of the year, boosted by solid earnings results and optimism that the Fed will take a cautious approach.

“Small caps remain a very key component of the market’s comeback story,” said Frank Cappelleri, executive director at Instinet. “Seeing demand reignite in the most speculative names would give us a strong indication” that the broader market’s gains can continue. The opposite, of course, is also true, he noted.

Even with its early-year rebound, the Russell 2000 remains further away from its peak than the S&P 500. The S&P 500 is 5% below its Sept. 20 record, whereas the Russell is 11% below its high from August.
Similarly, the Russell 2000’s advance-decline line dating back to 1995, a popular indicator of market breadth that measures the net number of companies rising each day, hasn’t made a new high since the start of the year, says Mr. Cappelleri.
The smallest companies are faring even worse. The iShares Micro-Cap ETF, an exchange-traded fund that focuses on some of the smallest publicly traded companies, fell 2.5% on Wednesday, its biggest one-day loss of 2019. It rebounded 1.7% Monday but is still down 12% in the past six months.

Market Facts

  • With Boeing dragging down the Dow, the blue-chip index lagged behind the S&P 500 by 0.68 percentage point Monday, just the third time in the past year it has trailed the broader equity gauge by at least 0.65 percentage point, according to Dow Jones Market data. The Dow has trailed the S&P by at least 0.65 percentage point just seven times in the last five years.
  • Apple shares rose 3.5% Monday for their largest one-day increase since Jan. 30, closing at their highest level since early December. Microsoft, Amazon, Alphabet and Netflix all also rose at least 2%, and all five stocks and Facebook are now each up at least 11% for the year with technology shares rebounding.
  • On this day in 1986, Oracle went public on Nasdaq at an initial price of $15 a share. The stock closed the day at $20.75, setting the stage for another software company, Microsoft, to go public the following day. Oracle shares closed at $52.66 Monday, giving the company a market value of about $190 billion. The stock is up 17% for the year. 

Key Events

U.S. consumer prices for February are expected to rise 0.2% from the prior month. The forecast excluding food and energy is the same.The figures are slated for 8:30 a.m. ET.
Fed governor Lael Brainard speaks at a National Community Reinvestment Coalition conference at 8:45 a.m.
U.S. Trade Representative Robert Lighthizer appears before the Senate Finance Committee to discuss trade at 10:15 a.m.
U.K. lawmakers are scheduled to vote for a second time on a Brexit deal. Prime Minister Theresa May warned Friday that if British lawmakers fail to endorse the new deal, Britain may never leave the European Union.

Must Reads

A U.S. Securities and Exchange Commission on an office door at the SEC headquarters in Washington. PHOTO: JONATHAN ERNST/REUTERS
Firms will pay $125 million to clients over fee practices. Almost 80 investment advisory firms agreed to pay back more than $125 million to clients who were steered into higher-cost mutual funds without being clearly told about cheaper versions.
Wells Fargo regulators are weighing an executive shakeup as its CEO heads to Washington. Wells Fargo remains at sharp odds with its government overseers. How sharp should come into focus Tuesday, when CEO Timothy Sloan appears before a House Financial Services Committee.
JPMorgan’s own clients are its biggest ETF buyers. JPMorgan’s Japan-focused exchange-traded fund is one of the fastest ETFs ever to surpass $1 billion in assets, but its biggest buyers were JPMorgan’s clients.
Bigger than E*Trade: A Chinese online broker soars. Bubbly Chinese stocks are back. Almost four years after an epic boom and bust, China’s markets are on another roller-coaster ride, with shares in internet companies and brokerage houses among the most volatile.
David Boies was dealt a setback in Venezuela’s oil conspiracy lawsuit. A U.S. judge threw out a lawsuit brought by the famed lawyer on behalf of Venezuela’s state energy company that alleged bid-rigging by oil traders.
A KPMG ex-partner was convicted in the “steal the exam” scandal. David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, was convicted Monday on accusations he was involved in a scheme to steal confidential information to help the Big Four accounting firm look better to its regulator.

What We've Heard on the Street

“Airbnb remains a long way from being able to deliver a knockout punch to larger online travel giants. But with so many travel customers already making its site a second home, the company appears to be in all the right places just in time for its public debut.”
—Heard on the Street columnist Laura Forman

Stocks to Watch

Alphabet: Alphabet unit Google agreed to pay $135 million in exit packages to two top executives who left the company after being accused of sexual harassment and covered up the reasons for their departures, according to a complaint filed in a lawsuit unsealed late in Monday’s session.
ADT: The home-security company posted a loss in its fourth quarter, though it said revenue is expected to rise this year.
Stitch Fix: The personal fashion company said quarterly profits and sales rose more than anticipated.
Coupa Software: The company said its loss widened in the fourth quarter as increased expenses weighed on its bottom line. The provider of postage online said its board has authorized a new share buyback program to repurchase up to $60 million of stock over the next six months. Shares have fallen 57% in the past year.

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