Market Summary
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
Investment Strategist
Click here to Connect on LinkedIn
gregoryclay@nellaadvisors.com
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