Russell 2000 leads the fade

11 déc.

US stock index futures were little-changed in early trade this morning. This follows a second successive negative close for all the four US majors last night, although these losses were, like Monday’s, relatively modest. Overall, US equities are experiencing a slight loss of upside momentum. This should not be much of a surprise considering the extent of the Russell-led rally since Trump’s decisive election victory in early November. The rally took the Dow, S&P, NASDAQ and Russell 2000 to fresh records. While the former three had made a succession of record highs throughout this year, the Russell had struggled to keep up. But in the aftermath of Trump’s win, the domestically-focused, small-cap index added 11% in the space of three weeks to take it above its previous all-time high from November 2021. But it now feels as if equities are coming off the boil. The Russell 2000 was the first to turn lower, with downside pressure dominating from early December. It was followed by the Dow just a few days later, and now the S&P and NASDAQ have joined in this week. Despite this, all four major indices remain within spitting distance of their respective all-time highs. So, the question remains: have US equities already topped for this year, or will they experience a resumption of the rally into the New Year? Much could depend on today’s inflation update and how that plays into next week’s interest rate decision from the Federal Reserve’s FOMC. The latest CPI reading comes out this afternoon. The year-on-year Core rate is expected to keep steady at 3.3% year-on-year, while the Headline CPI is forecast to tick up to 2.7% from 2.6% previously. Anything above this seems likely to rattle investors as it would be seen as an obstacle to the Fed for cutting rates at next week’s meeting. By every measure, inflation is still above the Fed’s 2% target. But worse than that, all inflation measures have lost their downside momentum. That’s not to say that inflation is about to take off to the upside again, just that it makes it harder for the Fed to justify further cuts. That, in turn, removes a significant tailwind to equity markets. Despite this, investor confidence remains high, perhaps showing some complacency. The VIX (a key measure of stock market volatility) has fallen back to lows last seen just after this summer’s volatility blow-out. With all the major indices still near record highs, and given the lack of a significant pullback since the summer, perhaps it would be sensible to trim some exposure. But as things stand, most investors are positioned for a positive run into the holidays.