Small Caps Fall 7.05% This Week

Small Decline This Week As Markets Cool

Admittedly, any calls for calm came too early in this bear market. But this week the projection was finally correct as there weren’t as many wild swings. It’s interesting that even though the S&P 500 fell 2.08% this week, which isn’t that much. Especially considering the prior week’s rally, we noticed a lot of negative sentiment returning to the market. 

It’s probably because the bears are licking their wounds from last week and want the market lower. Plus, the headlines are very negative and many are calling for a retest of the low. Some stocks have already retested their recent low, but the market hasn’t yet obviously.

Current psyche of most investors has been negatively impacted by this pandemic which has made us all a bit more negative than we normally would be. This week’s AAII investor sentiment survey showed the percentage of bears fell 2.3 points to 49.7% and the percentage of bulls rose 1.3 points to 34.2%. Technically, the percentage of bears fell below the magic 50% line, but only barely. 

Investors are still negative which is good. If the survey was released on Friday, it would show a few more bears since stocks are down. NAAIM exposure index fell from 25.87 to 23.67. It’s still well over double the trough 2 weeks ago, but it’s still very low. Speed of this decline didn’t allow the index to fall far enough. It has been lower than the recent trough since the 2009 bull market started.

Small Caps Are Getting Hosed

Small caps were destroyed this week. Russell 2000 was down 7.05%. It’s only 4.72% above its trough. We could see the S&P 500 stay above its low while the Russell 2000 makes a new low. Obviously, we need to be open to the small caps making a new low because they are 1 or 2 down days away from doing so. 

Russell 2000 is down 37.87% from its February 19th peak and 39.53% from its record high. It had an almost perfect double top. Decline in small caps is related to the decline in the financials.

KRE regional bank ETF was destroyed as it fell 11.43% this week and is just up 4.94% from its recent low. It’s down 47.21% since February 19th and 49.46% year to date. It’s not a good time to be a bank as the Fed cut rates to zero and delinquency rates are rising. 

People won’t be buying houses in the spring and the yield curve is relatively flat. 10 year yield closed on Friday at 59.6 basis points which puts it firmly in recessionary territory. We will know the recession is over when the 10 year yield gets back to 2%.

Most Recession Resistant Stocks

The table below reviews each sector’s performance in the past 3 major bear markets. As you can see, in the tech bubble, only communication services and tech lost market share. In the financial crisis, materials, industrials, consumer discretionary, and consumer staples lost share. Financials lost a lot of share, the others didn’t lose much. 

Finally, in this bear market, financials, energy, materials, and industrials lost share. Even though energy wasn’t exactly flying high at the end of 2019 given its major blowup from late 2014 to 2016, it dealt with a dual supply and demand shock which made it the worst performing sector of the year by far. Energy’s market cap as a percentage of the S&P 500 is the lowest going back to the 1940s.

Many investors believe tech stocks are recession resistant now because of their outperformance this year. They are likely doing well because this recession plays to their strengths. People are working from home more now than ever before which benefits firms like Microsoft and Amazon. 

It's unlikely that these stocks are immune to every recession in the future just because they are immune to this one. That being said, some of the cloud stocks with high renewal rates should avoid big revenue declines because they provide mission critical services.

COVID-19 Update

We can all forward to the time in a few weeks where I don’t need to update you on COVID-19 because it will be mostly over. However, that probabily won’t happen until at least May. In France the number of deaths spiked on Thursday because they started including nursing home patients. Number of deaths fell from 1,355 to 1,120 on Friday which is still elevated. 

We're not sure what changed in the reporting standards on Friday because the number of new cases spiked to 23,060 from 2,116. I’m guessing this spike won’t be sustained. There was great news out of Spain finally as the number of new cases fell from 7,947 to 7,134 which was the lowest since March 29th. Spain has stabilized like Italy.

Now we just need America to stabilize. Many think it will in 2 weeks. Great news out of America is the number of new tests per day increased to a new high of 139,613 as you can see from the chart below. Number of tests per day hadn’t been increasing in the past several days. In order for America to test at the rate of Germany, it needs to test people at a rate of 200,000 per day. Let’s hope this rate increases this coming week.

Further good news is the odds of there being 1 million cases in America by April 15th have fallen to 27%. This will likely fall to 0% in the next few days. There were 32,284 new cases on Friday which was up from 29,874. There were 10,423 new cases in New York. 

New York City is certainly close to its peak because it closed on March 20th and it takes 2 weeks to see an effect from a shutdown. Peak number of new cases in NYC was March 30th. Peak in hospitalization was the 30th. And the peak in deaths was the 31st. Peaks keep moving forward as the data gets updated. 

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