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Small caps are solving Wall Street’s concentration problem.
Small caps stumbled on Wednesday, but the Russell 2000 (^RUT) surged a staggering 12% over the previous five trading days, while the Nasdaq Composite Index (^IXIC) barely held positive. Any It is one of the major stock indexes in the United States, according to Bespoke.
The catalyst was the release of a dovish Consumer Price Index last week, which showed that prices were actually down 0.1%. The change in the sign of inflation was enough to convince Wall Street’s resistance that the stock market in 2024 will be more than just a bunch of big-name tech companies riding the artificial intelligence wave.
But laggards are once again turning their attention to the leaders, reminiscent of the “everything rising” that dominated the fourth quarter of last year.
As the grand giants decline, smaller, more dynamic groups fill the leadership vacuum. Sector rotation, they say, is the lifeblood of a bull market.
Real estate stocks have led the large-cap sector, rising 7% since last Tuesday’s close, followed by cyclicals and value stocks, with materials, industrials, energy and financials all up around 5%.
The only declines were in two of this year’s best-returning sectors, technology (XLK) and communication services (XLC), which fell 4% and 2%, respectively.
Taking a closer look at the financial sector, the SPDR S&P Regional Banking ETF (KRE) has rallied back to its downside points from last year’s internet banking crisis. The 16% surge is a notable move for regional stocks, which have had a tough two years since their 2022 highs.
The SPDR S&P Homebuilders ETF (XHB) also rose more than 14% on Monday, hitting its first all-time high since March.
The move is driven in large part by the prospect of calming inflation, but also by President Donald Trump’s surge in approval ratings following the weekend assassination attempt, and is also being bolstered by a sharp rise in the yield curve last week as investors believe looser regulations will benefit banks.
And then there’s crypto. With all the talk about a spot Ethereum ETF, the Bitcoin halving, Gary Gensler, and more, President Trump’s support for crypto has helped Bitcoin (BTC-USD) recover from a brutal sell-off that may have signaled a bear market.
After all the volatility of the past week, technology and communication services will remain the two biggest sectors to rise, each by about 17%, in 2024. But concerns around concentration can finally take a breather, at least for now.
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