Leaders-Laggards

After an initial pop & consolidation following the November election, small-caps may finally be springing back to life. The rotation into value stocks is certainly happening, but the long-term outlook will still be heavily dependent on the direction of inflation & interest rates. The biggest risk to the dollar is likely the yen, which threatens to strengthen sharply if the BoJ pulls the trigger on a December rate cut.

The huge positive momentum around crypto right now might actually be a bad thing for this sector. Some consolidation is to be expected, but small-caps so far haven’t quite gotten the bump that I would’ve expected. High yield spreads are nearly touching all-time lows, only seeing lower levels during the late 1990s and around the financial crisis.

Small-caps might have their greatest opportunity for extended outperformance in years. TIPS took a pause in the leadup to the election, but the noticeable move this past week could signal that the markets are taking inflation concern seriously. Long-term Treasury yields have given back almost all of their post-election rise, suggesting the bond market may finally be settling back down.