Is Market Cap Becoming a Liability?

By David Nelson, CFA CMT

With the President, First Lady and several in the administration contracting Covid-19 it begs the question has the calculus changed for investors. Initially after the President’s tweet late Thursday evening futures and markets around the world moved to risk-off. By the close of trading Friday U.S markets still ended in the red but looked more like a rotation than a full-blown selloff.

Friday’s Sector ETF Performance

Information Technology (XLK) was the biggest loser down over (-2.5%) yet cyclical sectors including Basic Materials, Financials, Industrials and even Energy ended in the green.

S&P 500 (SPY) vs S&P 500 Equal Weight (RSP) vs Russell 2000 (IWM) 1 Year

As pictured above large cap dominance over the last year has been difficult to ignore. However, as you can see in the relative performance charts below the price action in the last 6 months has been a different story. In fact small cap outperformance begs the question; is market cap becoming a liability? On Friday RSP and IWM both ended in the green and SPY driven by it’s large cap components didn’t recover on the day. Key for this trade to continue to work is economic activity improving forcing investors to look down the valuation curve hoping to pay less for growth. Even with the risk-free rate at zero large cap secular growth is getting expensive. Investors are desperate for some new blood to do the heavy lifting.

S&P 500 (SPY) vs Equal Weight S&P (RSP) vs Russell 2000 (IWM) 6 Months

Over the weekend we learned that there was considerable concern about the President’s health on Friday prompting officials to transport him to Walter Reed Hospital. There have been mixed signals from both Doctors and key White House personnel.

Despite a Tsunami of bad news stocks put in their first positive week in a month. Latest reports indicate the President may be back at the White House early this week. We’re less than a month away from the election which speaks volumes as to why the VIX and put premiums stay elevated.

Q3 earnings will kick off Tuesday as the major banks start to report so the next few weeks will have both earnings and political headlines driving stock performance.

Mall Death Watch

Sometimes the best information comes from sources outside of traditional research and economic data. Over the weekend I went to the Westchester County Mall in White Plains New York. The picture above isn’t that far off from what I saw on Saturday.¬†While there were some signs of life including the usual line in front of the Apple (AAPL)¬†Store most of the facility was dead. A significant number of the stores were closed and those that did have customers were clearly struggling.

For close proximity businesses like retail, a vaccine and or cure seems like the best hope. The retailers that will fare best in the upcoming earnings season I believe will be those that recognized early the need for an online presence and have made significant efforts to that end.

On top of the earnings kickoff this week we have the usual slate of economic releases including the FOMC minutes on Wednesday.

*At the time of this article some funds managed by David Nelson were long AAPL, SPY & RSP