Investors appear to be hedging against a Fed rate policy decision by focusing on domestic growth stocks. In the updated perf graph below, the Russell 2000 index (RUT) small capitalization index is clearly outperforming the larger cap indexes after the Brexit vote. The Russell 2000 index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 is comprised of a specific diversified category of small-cap domestic stocks.
Stocks in the larger capitalization indexes have more exposure to overseas economies and are further impacted by volatile energy pricing. Higher interest rates are generally presumed to adversely impact large multinational companies more dependent on the global economy. Higher rates should strengthen the U.S dollar and have a negative effect on companies attempting to convert foreign currencies into dollars. Also, a stronger dollar puts U.S. companies at a competitive price disadvantage when exporting to overseas markets.
You can see in the graph how investors are buying smaller capitalization index stocks at the expense of large cap shares. Investors concern about higher rates is also reflected in the relative under-performance of treasury bonds and gold stocks over the past few months.
By Gregory Clay
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