Russell 2000

"Rough Summer" For Small Caps Set To Continue

Small Cap stocks are in the middle of their worst summer doldrums since 2011 - and in fact for many individual stocks, worst summer since the collapse in 2008/9. While talking heads proclaim these smaller (supposedly more domestically-oriented) stocks a must-own, they have underperformed significantly as the credit cycle turns (thanks to their higher sensitivity to funding costs, among other things). Judging by this week's farce, the supposedly high-beta small caps are being BTFD'd aggressively either and perhaps that is because, since 1926, on average, September and October are the only months in which small-capitalization stocks have posted losses.

The Stock Market After The Mini Crash

Crash waves are notoriously volatile – several of the biggest one day rallies in history have occurred before and during crash waves. This makes short term forecasting even more of a coin flip than it normally is. However, we believe it is important not to lose sight of the forest for the trees; stock markets around the world have been in bubbles driven by extremely loose monetary policy, which ipso facto allows us to identify them as an example of artificial price distortion. Such bubbles always collapse sooner or later – unless the monetary authority decides to simply destroy the currency it issues, as has happened in Zimbabwe and is currently happening in countries like Venezuela and to a slightly lesser extent Argentina. We don’t expect the central banks of the developed nations to follow suit, at least not yet.