by Ivan Martchev

March 5, 2024

Why do I say “violently”? Because this is how the Russell 2000 Index moves. The small cap index dances to its own drummer. It can be up when the other indexes are down, and vice versa. Lately, it has been lagging a lot, and if we avoid a recession – this is a very big ‘if’ for 2024 – the index is likely to rally hard.

Small caps can get hammered the most in recessions, and they tend to rally the hardest in recoveries. If we don’t have a recession and the small cap index gets hammered – like it did in 2022 and 2023 – the index’s recovery, seen in the latter part of 2023, should continue in 2024, or so the theory goes.

IWM-Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The stock market is behaving well under the surface. We continue to see days where the tech sector gets a little overheated, so investors rotate into the broad market and small caps. The indexes move sideways and then start chopping higher. I know what a bubble looks like, as I have experienced 1999 and 2000 personally. This action that we see today can only be characterized as constrictive, and very far from a bubble. No, valuations are not cheap, but neither do they reflect an economy moving out of recession.

IWM-Chart-Two

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Since we have not seen a recession in this cycle, the indexes never got depressed, but they certainly have room to move higher if the economy holds up in 2024 – and the Fed cuts rates.

The economic numbers have been weakening of late, and it is unknowable if the sharpest monetary tightening in 40 years will wreak yet more damage to the U.S. economy. The Fed’s monetary policy is now restrictive, so all you need to do is deduct the inflation rate from the Fed funds rate and you will see that we are well into positive return territory. This is also true for many market-driven rates.

I do not believe that the upside surprise in inflation for January will persist, nor the upside surprise to the jobs report for the same month. Companies tend to raise their prices in January, and they also do a lot of hiring at the beginning of the year, making forecasting inflation and jobs harder than usual from January data. This puts extra burden on the February jobs report, due Friday, to deliver clarity on the jobs picture.

The stock market is certainly due for a correction, but the trigger for one is unknowable at the moment. Last year’s trigger was the failure of Silicon Valley Bank at just about this time of the year.  A 3%-5% selloff can come at any time, but it can also come from higher levels.

KRE-SPDR Chart 1

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This year, New York Community Bancorp (NYCB) is giving investors bad vibes, and so is the whole regional bank sector, as investors are not sure if there are any more shoes to drop, particularly given the issues in commercial real estate, much of it being financed by regional banks. The regional bank sector is down for the year, as the large-cap banks are ramping higher. It is pretty clear to me that investors are selling regional banks first, and asking questions later, sticking with the safer large cap banks.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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