Amid Rip-Roaring Start To 2020, Did Small Caps Just Flash A Warning Signal?

You could scarcely have asked for a more encouraging start to the new year if you’re in the camp that’s hell-bent on sticking around in equities after a historic 2019 that saw big-cap tech rise nearly 40% and the S&P nearly tie 2013 for the best year since 1997.

Wall Street stormed out of the gate in 2020, led by tech – the Nasdaq tacked on another 1.3%. Apple kept up the momentum after an 86% gain in 2019, surging more than 2% above $300 for the first time on a split-adjusted basis.

But there was one benchmark which wasn’t along for the ride – the Russell 2000 actually closed red. Thursday was among the five worst days for the small-cap gauge relative to the S&P going back to December of 2018.

For those keeping score at home (which presumably is everyone), that is the worst relative start to a calendar year for the Russell in a decade.

As Bloomberg points out, the proximate cause is obviously the disparity between the weight of tech and communications stocks in the small-gap gauge versus the S&P. If you’re a retail investor and you “just bought the damn robots” (to quote a popular CNBC personality), you had the best day since October 15:

Obviously, you can’t draw any conclusions from one session, but suffice to say that if you think small-cap performance is a harbinger of economic performance, just about the last thing you want to see is massive underperformance from the Russell versus comms services and tech more generally.

Then again, other manifestations of the various “bubble” trades in equities tethered to the duration trade in rates didn’t do as well as tech on Thursday. The Min. Vol. products, for example, underperformed on the day.

Whatever the case, Thursday was not the kind of cyclical rotation trade that optimists are hoping to see in the new year.

Oh, and speaking of that, 2020 kicked off with bull-flattening. That too bodes ill for the reflation narrative.