S&P 500 Slips, Russell 2000 Slides as Small Bears Brunt of Selling

That didn’t last long.

Associated Press

After rallying on Friday, stocks looked set to build on those gains. Instead, they fell apart like a sandcastle on a windy day. The S&P 500 dropped 0.2% to 1,964.82, while the Dow Jones Industrial Average dipped 0.1% to 16,991.91. The Nasdaq Composite declined 0.5% to 4,454.80 and the small-company Russell 2000 finished off 0.9% to 1,094.65. So much for small-caps showing positive leadership.

The folks at Bespoke Investment Group point to recent disappointing economic data:

Based on the recent economic data, it is interesting to note that even as market participants fret about when the Fed will hike rates, we have seen a consistent stretch over the last few weeks of weaker-than-expected US economic reports outnumbering better than expected ones. Yes, the data is still showing consistent growth, but just not to the degree that economists have been expecting or hoping. Pretty much sums up the economic theme of the last five years, doesn't it?

Stifel’s Barry Bannister and team don’t think the Fed will hike rates against that backdrop:

Too-soon exit or a too-strong dollar are negative, but we are not concerned as we see the Fed focused on labor recovery with prolonged, easy policy and a fed funds below PCE deflator through 2016. Energy, Materials, Industrials and Technology do well in that scenario, but if mistakes trigger deflation then defensive (Health Care, Staples) and rate sensitive (Utilities, Telco) typically outperform.

A strong dollar is one reason small-caps have been underperforming, says Credit Suisse’s Lori Calvassina and Sara Mahaffy:

…although many investors believe that a stronger Dollar should be good for smaller cap stocks due to a greater domestic revenue bias, a stronger Dollar has actually been more closely associated with risk off performance patterns in recent cycles. In the 1980′s, when CS FX Strategists note that the Dollar was viewed as a growth currency, small tended to beat large when the Dollar was rising. But in the post Tech bubble era, small and mid-cap stocks have been more likely to post declines and lag large when the Dollar is on the rise. Mid-caps have also tended to lag small cap in a rising Dollar environment, likely to their status as a risk asset and higher geographical diversification relative to small cap.

If that’s the case, last week’s small-cap strength might have been an aberration after all.