Market review 24.05.26
Hello everyone,
Here is a brief recap of the equity bull market:
In June 2022, homebuilders bottomed at multi-decade support (something counterintuitive at that time as we were amidst the steepest rate hike cycle in decades). A few months later, the S&P 500 made a major low with commercial hedgers significantly long equities. Later that year, homebuilders made a breakout.
In May-June 2023, we saw major breakouts in many sectors (eg. Industrials, Computer Hardware) and countries (eg. India, Japan). Commercial hedgers became record-long equities. I presented a historical timeline of the bull market last July, which can be found here.
As this bull market progressed, we’ve seen broader participation across sectors and global regions. Some ETFs that made new 52-week highs on Friday include SMH, EPI, GRID, FFTY, and BOAT.
The area that hasn’t participated is small-caps. But as I’ll highlight in today’s post, I believe small-caps are poised to outperform during this late stage of the bull market.
Going out on the risk curve
Over the past 30 months, SPY has gained 20% while IWM fell 5% (including dividends). Why have small caps underperformed so drastically?
The energy-heavy CRB Index remains within 10% of the 2022 highs, while T-bill yields have held above 4.5% since late 2022. This has challenged debt-laden small-caps with higher expenses, lower valuation multiples, and a lack of institutional demand, as any meaningful rally could likely be met with share dilution to reduce debt. We also saw a few regional banks fail as their customers’ deposits were held in long-duration bonds that took a significant hit.