The weakness in small-cap stocks this year suggests that perhaps the melt-up actually occurred last year when the S&P 600 SmallCaps soared 39.7%. The S&P 500 LargeCaps and S&P 400 MidCaps also soared 31.6% and 29.6%, respectively. So far this year, the S&P 600 has been moving sideways, underperforming the two larger-cap indexes. The bears are already growling that this is a sign of a top for the larger-cap indexes.
They note that valuation multiples are stretched. With the Fed’s release of the latest Flow of Funds data last week, we now know that the ratio of the market cap of all equities traded in the US (excluding foreign issues) to nominal GDP was 1.67 at the end of Q2, the highest reading since Q3-2000. Tobin’s Q valuation measure rose to 1.12, the highest since Q4-2000.
Today's Morning Briefing: Our Three Scenarios. (1) What’s next: melt-up or meltdown? (2) Rational exuberance scenario remains our most likely. (3) Inflation remains a no-show in all three scenarios. (4) In irrational exuberance scenario, foreigners could pile into the US dollar, bonds, and stocks. (5) 30% up and down? (6) The secular bull survives in two of our three scenarios. (7) Are small-cap stocks signaling that the end is near? (8) Hard to see recession in US. (9) Not so hard to see recessions in Eurozone and Japan, and slowdown in China. (10) Focus on market-weight-rated S&P 500 housing-related industries.
