Russell 2000 moves ahead of S&P 500

What pandemic?

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If the speed and strength of the rebound in the S&P 500 in the spring weren’t enough of a surprise for you, how about the fact that the small-cap Russell 2000 is now outperforming on a year-to-date basis? Despite the pandemic that has decimated activity and left GDP over 3.5% below its pre-virus level in Q3, the Russell is now up by 14.9% YTD, compared to a 14.6% gain in the S&P 500. It’s been lifted further in recent days by renewed hopes of a fiscal stimulus, which should benefit small caps the most.


Small businesses at least say they have grown more confident. Although it was little changed last month, the NFIB measure of small business confidence is near enough back at the pre-virus level.

Investors may be hoping those small firms still operating will gain pricing power; NFIB selling price expectations continued to rise in November and imply core inflation will soon be back at 2%.

US labor costs growth also appears to point to higher inflation ahead, although this measure should drop back sharply once restrictions are lifted.

In Germany, investors have become less positive about the outlook, although their expectations for the next 12 months are still elevated.

In China, consumer price inflation dropped into negative territory in November. But the rise in producer price inflation removes deflationary risks for those countries that tend to import a lot of stuff from China.


It’s not just small-cap equities in the US that have been doing well. Emerging market currencies mostly continue to trend up, with the SA rand rising by a further 1.2% yesterday. The Turkish lira appears to have plateaued again.

In another sign of positive market sentiment, electrical vehicle stocks have all turned up again to some degree in the past few days.

Investors appear in no mood to bet against the ECB, which meets on Thursday. They bid the 10-year Portuguese yield down to -0.01% yesterday, a striking development given yields were 2%-points above those in Spain just three years ago.

Portugal’s government debt is 120% of GDP. That’s no longer that high in an international perspective, but remember that as a member of the euro-zone Portugal can’t print its own debt, so the chance of an actual default is higher than elsewhere. At least, it would be if the ECB weren’t prepared to buy the debt itself.

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