Affected by multiple uncertainty concerns, the US stock market "canary" is issuing an alert, and the Russell 2000 small cap stock index has once again seen a critical moving average "dead cross" after six months.
Boris Schlossberg, macro strategist at BK Asset Management, said in an interview with First Financial that this is a signal of caution. The weakness of small business stocks is one of several signs that investors are uneasy about the economic outlook, as they are more susceptible to economic changes.
Data shows that the confidence index of small businesses in the United States has dropped to its lowest level in the second half of the year. At the same time, a survey by Bank of America institutions found that being long in the US dollar has become the most crowded trade, and as the Federal Reserve's policy expectations fluctuate, the market's game over interest rate prospects may indicate that volatility risks still need to be released.
Small cap stocks continue to sell under pressure
While the three major US stock indices have stabilized recently, the sell-off of small cap stocks has not ended. According to Dow Jones market data, the Russell 2000 index has once again experienced a "dead cross" between its 50 day moving average and 200 day moving average since April this year, which is often seen as a sign of increased selling momentum. It is worth noting that this is also the first time that the index has experienced this situation twice in the same year.
Data released last week showed that the NFIB Small Business Confidence Index in the United States fell to a new low in nearly four months in September, and inflation and labor quality remain the top business issues for employers. NFIB Chief Economist Bill Dunkelberg said, "Business owners are still pessimistic about the future business situation, with sales growth slowing for small businesses and profits squeezed. Apart from raising prices to obtain economic relief, business owners have almost no other choice
As an important component of the economy, small and medium-sized enterprises contribute about 40% of the United States' gross domestic product (GDP), and the Russell 2000 index is the "canary" of the economy for the market. According to Koyfin, a financial data provider, after collecting historical data, the current pricing ratio of the Russell 2000 Index and the NASDAQ 100 Index has reached a record low, surpassing the record of the Internet foam peak in March 2000. Because investors believe that soaring interest rates and treasury bond bond yields have brought greater pressure on small companies, which are more vulnerable to market shocks than large enterprises.
First Financial reporters also noticed that cyclical industries sensitive to the economy have generally performed poorly since October, with raw materials, finance, and real estate leading the decline. As the holiday season approaches, retailers are not recruiting temporary personnel as aggressively as in previous years. According to Challenger, Gray& According to a follow-up survey by Christmas, holiday recruitment by American retailers this year is expected to reach its lowest level since the financial crisis. Consumers are still under inflationary pressure, although the monthly retail sales rate in September was better than expected, with price increases becoming an important driver, while sales of non essential goods such as electronics, clothing, furniture, etc. have cooled down.
Schlossberg told First Financial reporters that market sentiment seems to have become somewhat fragile recently, and defensive capital flows are clearly preparing for a possible economic cooling. He believes that the real risk lies in whether the Federal Reserve's response is timely as the effects of monetary policy gradually emerge. Historically, there have been few successful cases of achieving a soft landing through aggressive interest rate hikes.
Institutional increase in USD hedging
Since the September Federal Reserve's interest rate meeting, changes in market expectations for the future policy path have driven a significant increase in US dollar and US bond yields, resulting in continued tightening of financial conditions and fluctuations in risky assets.
Recently, nearly one-third of Federal Reserve officials have spoken out about the US bond market, believing that this means there may not be a need for further interest rate hikes in the future. However, as the situation in the Middle East heats up, coupled with employment and inflation indicating economic resilience, investors are once again evaluating the possibility of further tightening, and the space for interest rate cuts next year has narrowed.
OANDA Senior Market Analyst Craig Erlam told First Financial that the inflation pressure in the United States is gradually easing, but still far above the Federal Reserve's target. The Federal Open Market Committee (FOMC) is likely to temporarily reserve the option of further action and determine the future path based on data. At the current interest rate level, the slowdown in the US economy is only a matter of time, and the policy risk of excessive tightening cannot be ignored, "he said.
The monthly fund manager survey released by Bank of America last week showed that being long in the US dollar has become the most crowded trade, and the role of a safe haven has once again become apparent.
Bank of America believes that institutions are once again paying attention to the direction of interest rates. According to FactSet data, the US dollar index remained high and volatile after hitting an 11 month high of 107 on October 3rd. Fund managers surveyed said that strong economic data from the United States, coupled with the Federal Reserve being relatively stronger than other major central banks, may be the most likely reason to support further strengthening of the US dollar.
It is worth noting that the proportion of cash levels in investors' managed assets has rebounded to over 5%. Investors' expectations for economic growth remain pessimistic, with nearly 50% of investors predicting a global economic weakness in the next 12 months. Concerns about a hard landing in the economy are intensifying, with the proportion of investors believing that the economy will experience a hard landing rising from 21% in September to a net 30% this month.
Erram told reporters from First Financial that for risky assets, a "soft landing" should be the best scenario. "For the Federal Reserve, how to communicate policy prospects with the outside world and reduce uncertainty will be beneficial for economic recovery and market confidence recovery." For the outlook of small cap stocks, he believes that due to the overall valuation of the large cap index being at historical highs, relatively speaking, Small cap stocks with stronger cyclical characteristics are more attractive and resilient, but we still need to wait and observe.