Small Cap/Large Cap Sectors, Chinese Yuan

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Small Cap/Large Cap Sectors, Chinese Yuan

Two “Data” items today, but first a quick comment about today’s market action.

The S&P 500 closed on the lows of the day and the year to date. The Russell 2000 just avoided closing at the lows of the day, but it did make a new YTD low. Importantly, 10-year Treasury yields declined as the day progressed and are NOT anywhere close to YTD highs. We can’t blame today on higher long-term yields, in other words.

Tomorrow will see several large cap banks/financials report (JPM, C, WFC, BLK), and their earnings should be excellent, but that clearly did not matter today. This is not a good sign. As we discussed in Story Time, the US equity market narrative is finely balanced between fundamentals (corporate earnings) and macro (Fed policy). Today is one signal that the scales are tipping towards macro concerns over fundamental strength.

To be clear, we’re explicitly not saying “Sell everything and run for the hills”. Earnings reports over the next few weeks should be excellent. Yields may have had their run for now. The Fed blackout period ahead of the month-end FOMC meeting starts tomorrow evening. Fundamentals can reassert some control over market direction.

The point here is that today is an excellent example of what we’ve been discussing with you over the last 2-3 weeks: US equity markets are going to be volatile even as we get solid earnings results. We’ve seen too many market cycles to wave away macro concerns and cling to defenses like “but earnings are great! … The market doesn’t get it!” We’re still optimistic for the year but continue to advise caution in the near term.

And now, onto our Data topics:

#1: A comparison of large (S&P 500) and small cap (S&P 600) US sector returns for the year to date.

Technology (no difference)

  • Large Cap: -5.5 percent
  • Small Cap: -5.5 pct

Consumer Discretionary (0.2 points better to small caps)

  • Large Cap: -3.4 percent
  • Small Cap: -3.2 pct

Health Care (3.8 points better to large caps)

  • Large Cap: -4.7 percent
  • Small Cap: -8.5 pct

Financials (3.0 points better to large caps)

  • Large Cap: +5.7 percent
  • Small Cap: +2.7 pct

Energy (0.2 points better to small caps)

  • Large Cap: +13.6 percent
  • Small Cap: +13.8 pct

Consumer Staples (1.9 points better to large caps)

  • Large Cap: -0.3 percent
  • Small Cap: -2.2 pct

Utilities (1.2 points better to large caps)

  • Large Cap: -2.4 percent
  • Small Cap: -3.6 pct

Materials (3.6 points better to large caps)

  • Large Cap: -1.2 percent
  • Small Cap: +2.4 pct

Industrials (2.6 points better to large caps)

  • Large Cap: +0.6 percent
  • Small Cap: -2.0 pct

Takeaway: in almost all cases (6 of 9), large cap sectors are outperforming their small cap equivalent YTD. Interestingly, however, the S&P Small Cap 600 is modestly outperforming the S&P 500 YTD: -1.3 percent versus -2.3 percent. Why? The single largest reason is Energy. Even though the performance is similar between small and large cap sectors, the S&P 600 has a 5.6 weighting in Energy while the 500 only has a 3.1 percent weight. That seemingly small difference is enough to give small caps an edge YTD.

#2: Checking in on the Chinese offshore yuan. Here is a 1-year chart of the currency, which floats more freely than the official rate. At 6.36 to the dollar, the yuan is very near its strongest levels of the last year. It is also essentially unchanged from its year end 2021 level (6.35/$ as well).

Takeaway: between ongoing pandemic issues, real estate sector woes, and questions about Chinese government policies surrounding local Big Tech, one might expect the yuan to be showing some weakness, but it clearly is not. That is a positive sign about the strength of the global economy since it means there is plenty of demand for yuan to pay Chinese suppliers. It may not be what the Chinese government wants to see (a weaker yuan would help exports), or even the Federal Reserve (more expensive imports over time), but on a day where good news was in short supply we’ll take it.