Investors Ditching Safe Havens In Favor Of Small-Cap Stocks

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(Friday Market Open) Equity index futures are pointing to a higher open on Friday morning as Russian President Vladimir Putin said that there was a positive shift in talks with Ukraine despite reports of talks breaking down on Thursday. The news prompted the S&P 500 futures to test the 4,300 resistance level. As always in these situations, watch the first 30 minutes to see if the Market can hold those gains.

While the news story is developing, uncertainty around the market appears to be easing. The Market Volatility Index (VIX) has fallen below the 30 level. Additionally, gold futures were trading 1.5% lower in premarket action, suggesting some investors are leaving safe havens. Investors may be in search of riskier assets because the Russell 2000 futures were up 1.42% before the opening bell. Considering these developments in light of the selloff in Treasuries the last three days, investors may be in a buying mood going into the weekend.

Investors appear to be ignoring a negative report on the U.S. economy. Goldman Sachs GS downgraded its forecast for the U.S. economy and increased the likelihood of recession. Analysts are projecting the economy to grow at 1.75%, which is below the consensus estimate of 2.75%. The reported sited rising commodity prices, falling consumer spending, and tightening financial conditions that may restrict business access to capital.

While investors may be looking for potential buys on Friday, one stock that they don’t appear to favor this morning is Rivian Automotive RIVN. The company was down more than 8% in premarket trading after missing on top and bottom line earnings. The company hasn’t been able to ramp up production as it hoped. RIVN projected 25,000 vehicles made this year, but Wall Street was hoping for a number closer to 40,000.

DocuSign DOCU was also falling dramatically ahead of the opening bell, tumbling 15.85% after missing on revenue despite meeting earnings estimates. DOCU also provided disappointing guidance for its next quarter due to fewer returning customers as the waning pandemic allows contracting parties to meet in person. The company has lost all of its pandemic gains at this point.

Investors appear to be more interested in stocks like Sanderson Farms SAFM, which was up about 1.2% in premarket trading. SAFM reported a beat on earnings and revenue estimates.

Ulta Beauty ULTA also beat on earnings estimates and rallied 2.54% in premarket trading. The company also increased its full year earnings outlook.

Reviewing the Market Minutes

Stocks traded lower on Thursday as investors appeared uncertain on what to do next. The S&P 500 (SPX) did not break resistance at 4,300, failing to follow through on Wednesday’s rally and closing 0.55% lower. The Dow Jones Industrial Average ($DJI) and the Nasdaq Composite ($COMP) also fell 0.34% and 0.95% respectively. Small-cap stocks appeared to outperform large-cap stocks because the Russell 2000 (RUT) was down just 0.23%.

The 10-year Treasury yield (TNX) shot higher once again as the Consumer Price Index (CPI) was reported. The TNX is now back above 2%. The 2-year Treasury yield has also touched 1.7%. Despite the rise in these yields, the CME FedWatch Tool only appears to be certain about rate hikes next week and another in May. After that, the market appears less sure despite inflation hitting a fresh 40-year high.

The CPI report measured a 0.8% increase month over month and a 7.9% increase year over year, which means inflation grew as expected. However, these are still very high numbers not seen since the early 1980s. Core inflation that excludes food and energy was up 6.4% year over year, which was higher than the forecasted 5.9%. Equity index futures rallied on the report but gave back the gains soon after. All in all, there isn’t much here that is likely to push the Fed off the course that Chairman Jerome Powell described to Congress last week. 

CHART OF THE DAY: SEEING VALUE. The S&P 500 Pure Value Index ($SP500PV—candlesticks) has risen 8.82% in the last six months. The S&P 500 Pure Growth Index ($SP500PG—pink) has fallen 15.51%. The value index continues to demonstrate relative strength (green) compared to the growth index. Data Sources: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Growth Yields to Value: The rise in yields appears to be strengthening value stocks. The S&P 500 Pure Value Index rose 0.10%, while the S&P 500 Pure Growth Index fell 0.94%. I’ve noted a couple of times that value stocks started making their push about six months ago. This push correlated with the 10-year Treasury yield breaking higher in September and continuing to climb. Faster-than-expected inflation near the end of 2021 helped push the 10-year yield from 1.3% to 2%.

Two ways value stocks can continue to outperform is, first, if yields continue to climb, then valuation will continue to matter, and investors will likely favor value. Second, if the Russian-Ukraine conflict continues, interest rates may not go up as much or even pause, but investors will likely shun the risk of growth stocks during an uncertain future.  

Perhaps the best scenario for growth stocks would be for the conflict to end and inflation to slow. Slowing inflation would require the wheels of production and manufacturing to quicken so that supply could meet the rise in demand or for demand to slow so supply could catch up.

Peace Falls to Pieces: On Thursday, peace talks between Russia and Ukraine broke down on without any progress. Talks appeared to get bogged down in accusation and denials. Meanwhile, the war continues as Russian bombs drop on Ukrainian cities, and Ukrainian civilians flee war zones.

Despite the ongoing war and the back and forth in talks, commodity prices continued to tumble with crude oil futures dropping 2.10% on Thursday but up slightly in this morning in premarket action. In fact, most oil-related commodities traded lower including brent crude, West Texas crude, RBOB gasoline, and heating oil. Other commodities where Russia is a big player have also fallen. Wheat futures fell nearly 10% and have fallen more than 16% in the last three days. Palladium was down 0.64%, which is about 7% lower than where it was on Wednesday. Nickel futures fell about 9% and is down about 47% from its high on Wednesday. 

Apparently, commodity investors feel like they got carried away and prices are correcting despite the ongoing war and the related sanctions.

Making a Split: Amazon AMZN rallied 5.41% in reaction to its stock split and stock buyback program announcement. About a month ago, Alphabet GOOG also announced a stock split. These may have people wondering if stock splits are going to become popular.

A stock split doesn’t change the value of a position. What investors gain in shares, they lose in the stock price. However, a stock split helps attract other investors who can’t afford to buy Amazon at $3,000 per shar without overweighting their portfolios in the stock. According to Barron’s, companies like Booking BKNG, AutoZone AZO, Chipotle CMG, Tesla TSLA, BlackRock BLK, and O’Reilly Automotive ORLY are potential candidates for future split announcements. 

Image sourced from Pixabay

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