Small caps are often used as a gauge for domestic growth because they are more sensitive to changes in economic conditions, such as input costs, wages, financial stress...

Many were caught off guard by the equity rollover in early October, but few were paying attention to what was occurring. In late September, financial conditions began to tighten and credit spreads began to roll higher. I wrote about this several times for my subscribers. There is a strong correlation between dollar strength and rising credit spreads.

The correlation between small caps ( IWM ) and credit is rather significant. The 30-week correlation between junk ( HYG ) is .92 and investment grade ( LQD ) .85. It's also important to understand that over half of all Russell 2000 companies make no money, which is detrimental when margin compression occurs.

There is no reason to doubt why the Russell rolled over, leading broader U.S. equities, just as financial conditions began to tighten.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.