Broker Check

Weekly Market Update March 29, 2024

March 31, 2024

Fed Funds 5.25% - 5.5%, US Ten Year 4.205%, Oil $83.17

The final week of the quarter was uneventful, with the Dow Jones Industrials and S&P 500 rising while the NASDAQ ended a bit lower. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index was up 0.3% in February, in line with expectations. Resilient inflation is pushing interest rate reductions further into the future. Employment as measured by payroll data remains strong, but oddly conflicts with the household survey, which shows job losses. Mixed signals lead to uncertainty, which adds to the central bank’s hesitancy to change their stance on rates.

It may have gone unnoticed, but small capitalization stocks, as represented by the Russell 2000 index, had a particularly good week. Small cap stocks have trailed their larger brethren significantly since the indices’ peaks in October of 2021. While the other indices have all made new highs since then, the Russell 2000 has been moving sideways.

Does this recent strength provide any guidance going forward? Smaller companies are more dependent on borrowing, especially bank borrowing, as they try to grow their business. They are much more affected by interest rates than larger companies who have enough cash flow to fund their growth, or can borrow at lower rates, or can issue their own debt. This negative correlation between small cap stock price performance and ten-year interest rates is below.

All major equity indices including the Russell 2000 spiked under the zero-interest rate policies enacted in the spring of 2020 in response to the covid-19 uncertainties, but that lasted a mere 18 months and reversed when the Fed began hiking short-term rates to combat surging inflation. The other major indices also fell, but quickly recovered their footing and reached new all-time highs while the small cap index has been flat. The recent strength of small caps may foresee lower long-term rates in the not-too-distant future, suggesting investors give small cap stocks a place in their portfolios.

Have a Profitable Week,