Many passive investors, such as those in retirement plans, use the start of the new year to rethink their passive investments and reallocate accordingly. One of the decisions that is often made is how to split the stock allocation between large and small caps. For those choosing between large-cap and small-cap stocks, here are some charts below.
The chart on the left shows that the large-cap index has twice as much exposure to the technology sector as the small-cap index.As a result, the small-cap index tends to have more exposure to less volatile stocks. there is. If you’re bearish about the year ahead, this could be a factor in favor of small caps. However, there is something to be worried about when looking at the graph on the upper right. Shows that more than 40% of his small-cap stocks are unprofitable. In our opinion, the point is to be selective. Value-oriented funds are worth considering if you want exposure to small-cap stocks. Finally, the bottom right chart shows large-cap and small-cap stocks in the last four significant market drawdowns and their rebounds. In general, small-cap stocks tend to show stronger rebounds, but drawdowns are on par with large-cap indexes.
Each market cycle is different, but hopefully this provides a little guidance for those doing 401k allocations.
what to see today
Economics
- 7:30 AM ET: challenger job cuty/y, Dec (416.5% of previous)
- 8:15 AM ET: ADP Employment ChangeDecember (forecast 150,000, pre-127,000)
- 8:30 AM EST: trade balanceNovember (-$63.1bn forecast, -$78.2bn)
- 8:30 AM EST: first unemployment insurance applicationthe week ending December 31 (225,000 forecast, 225,000 ahead)
- 8:30 AM EST: Continuous billingfor the week ending December 24 ($1,727,000)
- 8:30 AM EST: S&P Global US Service PMIDecember final (forecast 44.4, previous 44.4)
- 8:30 AM EST: S&P Global US Aggregate PMIDecember final (before 44.6)
Earnings
Market trade update
Yesterday the market was finally able to have a positive trading session. But the overall action was disappointing, with a big surge early in the morning and just giving up on it during the day. Nevertheless, the market has remained in a very narrow consolidation range over the past few weeks and may be looking to build a foundation here in the short term. We may see some follow-through action in the next few days as the MACD signal improves.
As we mentioned yesterday, there are many resistances where some moving averages converge. This will be the first real obstacle to an uptrend in trading over the next few days. Be vigilant for now. We are looking for a break just above these moving averages. “Bullish Swagger” To more comfortably undertake additional short-term trading risks.
no one has a crystal ball
As we head into the new year, remember again that neither the Fed nor Wall Street has a crystal ball. Forecasts of the future are sometimes accurate, but often at turning points in monetary policy, they can stray far from target. In his 3 paths for 2023, he shares market predictions for the Fed and Fed Funds. The forecasts are slightly different, but both show little volatility forecast for the Fed Funds. The first chart below the article shares the Fed’s 2022 estimates from December 2021. The following chart from Investors are Grossly Underestimating the Fed shows that the market overvalues ​​the Fed Funds by 2-2.5% when the Fed cuts rates.
We don’t claim to have a crystal ball either. That said, I do understand that there is a good chance that “something will break” and a third path for the Fed to cut rates significantly. Per article:
A third channel for the Fed to aggressively cut interest rates is in response to a significantly weakening economy, falling inflation much faster than expected, or financial instability. It could also be a combination of any or all three factors.
New high vs.New lows help determine trends in bull or bear markets
Graph below from @ukalewitz We provide risk management tools to help you navigate the market. The S&P 500 is displayed alongside a 10-day moving average of daily sums of new 52-week highs minus lows. Moving averages tend to be positive during bullish trends and negative during bearish trends. In fact, it was below zero for the entirety of 2022. Moreover, each time it rose to zero, it approached the peak of the local market.
It recently peaked and fell from zero at the same time. Based on the graph, you should not expect new lows until the number of new lows exceeds the number of new highs by at least 300.
JOLTs Hot ISM Not
JOLT’s employment report shows no deterioration in the labor market. Job openings put him at 10.45 million, just below his 10.51 million last month and well above expectations of a drop to 10.05 million. Friday’s BLS labor data dump bodes well for a relatively strong report. As we’ve discussed, the Fed wants to ease the tightness in the labor market to help fight inflation. Reports of JOLTs only add to their fears.
The ISM has fallen further into contraction territory, but like JOLT the employment subcomponent has risen and is still in expansion territory (>50). However, new orders, a reliable predictor of future economic growth, are currently at their lowest level since mid-2020. The ZeroHedge graph below shows that prices and new orders have dropped significantly, approaching the 2020 covid lows.
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