Stocks traded relatively flat this morning after enjoying a major bounce back in the week prior. The market rallied fiercely before falling last Thursday in response to a poor Meta Platforms (NASDAQ: FB) earnings call, in which CEO Mark Zuckerberg provided dismal forward guidance.
Investors were initially worried that this could indicate a wider-spread issue for tech shares. Then, Amazon (NASDAQ: AMZN) reported a blowout quarter one day later, effectively stopping the Meta-driven selloff.
A major January jobs “beat,” reported on Friday, seemed to stabilize stocks as well even though it was the result of a massive, unprecedented seasonal adjustment by the Bureau of Labor Statistics (BLS). Last month’s real, unadjusted jobs data saw a loss of 2.8 million payrolls. Had the BLS used an apples-to-apples seasonal adjustment, mimicking its adjustments of the past, the headline number would’ve come in at approximately -301,000 jobs.
The most important part of the January jobs report had nothing to do with payrolls, however. Instead, rising hourly wages (+5.7% year-over-year vs. 5.2% expected) should’ve scared bulls. The Fed’s watching inflation – not employment – as its key metric for hiking rates. In that regard, the January jobs report provided a highly bearish impulse.
But stocks rallied through Friday’s close nonetheless. Today, the major indexes largely stalled as sentiment wavered once again.
“Investor psychology is shifting almost week-to-week, meaning sticking to one’s investment convictions is about as hard (or painful) as ever, but also never more important in driving outperformance,” explained Raymond James strategist Tavis McCourt.
“Our conviction remains that economic strength will keep [earnings per share] going higher along with interest rates, as we suspect we remain a long way from higher rates materially slowing demand in the economy.”
As we saw in 2018, back when Fed Chairman Jerome Powell raised rates several times, the market tanked before the rate hikes really impacted earnings.
These days, though, earnings have suffered for many of the market’s smaller stocks. Meanwhile, Big Tech names (minus Meta) feasted.
“It has been a raging bear market for high multiple stocks and for anything speculative in nature. It’s just been taken out to the woodshed. So, there’s probably some value being created there now,” said Morgan Stanley’s Mike Wilson.
He’s absolutely right. For Big Tech, the top might be in as interest rates threaten to surge in the coming months. There are plenty of beaten-down stocks following the latest earnings season, too, especially in the small-cap Russell 2000 index.
In 2021, the S&P ripped 26.89% higher while the Russell 2000 gained just 13.46% by comparison. This year, the S&P is down over 5.50% and the Russell 2000 has almost doubled that, falling roughly 10%.
Investors searching for value need look no further than small-caps. On the other hand, there’s nothing to suggest that the small-cap rout is over just yet. The Russell 2000 plunged below its mid-2021 lows back in January.
And the index won’t hit key support unless it drops another 10% from here. It’s been said that small-cap stocks provide a clearer picture of the US economy than the S&P because only 10% of the Russell 2000’s revenues come from foreign sources. The S&P derives roughly 40%-50% of its revenues from overseas.
This suggests that, contrary to most of Wall Street’s opinion that “the going is good,
the US economy is in serious trouble. And the Fed’s about to hike rates into economic weakness.
Once the dust settles, small-caps could be set to finally overachieve as rising rates limit high-growth (and as a result, high-debt) tech firms. But until the pain stops and small-caps show signs of reversing higher, Big Tech could continue to steal the show in the short term.
Even if, macroeconomically speaking, Big Tech’s dominance may be drawing to a close as early as next month.
