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Apr 30, 2019
Markets | Small Caps Stand to Benefit From Stronger Dollar
Good morning, I'm Jessica Menton, here with your daily market update.
The broader market could benefit from a small-cap rally, some investors say
A resurgence in the dollar potentially bodes well for one group that
has struggled to reclaim record territory after last year’s rout:
The Russell 2000 index of small-capitalization stocks remains 8.2% below its August record,
while larger peers have recently topped their all-time highs following a
bruising fourth-quarter selloff. The S&P 500 and Nasdaq both
tallied new records on Monday, while the Dow Jones Industrial Average
sits 1% away from its October closing high.
But a recent bounce in the U.S. dollar and tepid inflation
could help boost small-cap stocks, which are more tied to the domestic
economy than their larger counterparts. Meanwhile, Federal Reserve
officials are widely expected to leave interest rates unchanged
at their meeting this week, which could help small companies. As
interest rates climb, so do the cost of the loans small businesses
Small caps, which typically have a market value of about $2 billion or less, are at an important juncture. The
Russell 2000, which has climbed 19% this year, is outpacing the S&P
500's 17% rise. Although the Russell 2000 rebounded in early 2019, it
to stay above 1600, a key resistance level. How small-cap stocks
perform in the near term could be a telling sign for the trajectory of
the broader market this year, some analysts said.
Eric Marshall, portfolio manager of the Hodges Fund, which includes
both large and small companies, said the firm has bought small-cap
stocks this month across a broad array of sectors including financials,
consumer discretionary, technology and health care.
“We do think you can find opportunities in small caps, in particular
some of the beaten-down financial stocks, technology in both software
and semiconductors, as well as some of the more cyclical areas like
homebuilding,” Mr. Marshall said.
A rise in the dollar has made some analysts more optimistic. Small caps
are more insulated from a stronger dollar than larger companies because
their revenues are more likely to come from inside the U.S. Meanwhile,
larger multinationals have more exposure overseas, making foreign
revenues smaller when converted back to dollars.
The dollar climbed to its highest level of the year last week, boosted by better-than-expected economic data.
The WSJ Dollar Index, which gauges the U.S. currency against a basket
of 16 others, slipped 0.1% Monday to 90.81. Since the dollar first hit a
fresh 2019 high on April 23, the Russell 2000 has climbed 2.5%.
To be sure, small-cap stocks still look pricey to some investors. The
Russell 2000 trades at 35.6 times projected earnings over the next 12
months, higher than its 10-year average of 29.7, according to FactSet.
The S&P 500, meanwhile, is trading at 19.2 times projected earnings,
up from its 10-year average of 17.6.
Heading into Tuesday's trading, the S&P 500 and the Nasdaq this
year have climbed 17% and 23%, respectively, putting both indexes on
pace to notch their largest four-month percentage gains since December
2010. The Dow has climbed 14% so far this year and is also on track for
its biggest four-month percentage rise since January 2018.
Alphabet shares slid 7% on Monday in after-hours trading after the
Google parent posted first-quarter revenue of $36.3 billion, roughly $1 billion short
of forecasts. If the losses hold through the close of today's trading,
it would mark the stock's largest percentage loss since October 2012,
when it dropped 8%.
On this day in 1999, Priceline.com, which had gone public at $16 a
share exactly one month earlier, closed the day at $162.38—giving the
internet company a one-month return of 915% and a total market value of
$23 billion. But it was all downhill from there. Priceline ended up
trading for less than $6 per share by October 2000. The company rebranded itself as Booking Holdings in 2018 and is once again one of the move valuable American tech companies.
Germany's consumer-price index for April is out at 8 a.m. ET.
The U.S. employment-cost index for the first quarter is expected to increase 0.8% from the prior quarter. The figures are out at 8:30 a.m.
The S&P/Case-Shiller home-price index for February, out at 9 a.m., is expected to rise 2.8% from a year earlier.
The Chicago purchasing managers index for April, slated for 9:45 a.m., is expected to tick up to 58.8 from 58.7 a month earlier.
The Conference Board's consumer-confidence index for April, released at 10 a.m., is expected to rise to 126.0 from 124.1 a month earlier.
U.S. pending-home sales for March, also out at 10 a.m., are expected to rise 1.5% from the prior month.
President Donald Trump is set to meet with House Speaker Nancy Pelosi, Senate Minority Leader Chuck Schumer and other Democrats for talks on infrastructure spending at 10:30 a.m.
WeWork, which subleases office space on a short-term basis to a variety
of companies, previously reported a loss last year of $1.9 billion on
revenue of $1.8 billion. PHOTO: MANDEL NGAN/AGENCE FRANCE-PRESSE/GETTY
WeWork filed for an IPO. Shared office space giant WeWork said it has filed for an initial public offering,
making it the latest highly valued startup to shoot for the public
markets this year. Chewy Inc., the online seller of branded and
private-label pet food and grooming supplies, has also filed documents for an IPO.
Copper’s slide is signaling caution about Chinese growth. A slide in copper prices in recent days is causing investors to grow warier of a slowdown in Chinese economic growth, increasing their focus on coming trade talks. Meanwhile, a gauge of China’s factory activity weakened sharply.
A bitcoin venture backed by the NYSE owner is facing a fresh delay. A plan by the owner of the New York Stock Exchange to make it easier for consumers to pay for purchases in bitcoin faces further delays after the venture, called Bakkt, said it was applying for a license from New York state regulators.
Regulators are scrutinizing trades before the Anadarko deal announcement. Traders used insider information
to turn a profit of about $2.5 million related to the sale of Anadarko
Petroleum Corp., according to the Securities and Exchange Commission.
Verizon retirees are urging changes to the company’s executive pay practices. Verizon
shareholders will vote at the company’s annual meeting this Thursday on
a proposal that the retirees hope will persuade Verizon to stop offering executives an investment option in their company-sponsored savings plans it doesn’t offer to rank-and-file workers.
What We've Heard on the Street
“WeWork is building off a tech-IPO foundation...The New York-based
company may be hoping to fetch a tech-like valuation in the wake of
other recent initial public offerings.”