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Weekly Market Performance – Small Caps Strong in the wake of Dollar Weakness

performance chart

US and International Equities

The major market indexes reversed course from last week to finish this week higher. The tech-laded Nasdaq composite was the bright spot, returning 3% this week. So far, the Nasdaq composite is up over 43.4% for the year and is on track to post its best annual return since 2009 (43.9%).

The markets shrugged off weak economic data released this week, anticipating an economic recovery next year. Moreover, market participants are expecting an approximately $900 billion stimulus package that includes stimulus checks, additional unemployment benefits, and small business assistance to be approved as soon as this weekend.

International markets also finished the week higher. Emerging markets (MSCI EM Index) underperformed their developed international counterparts this week, as denoted by the MSCI EAFE Index.

The information technology and consumer discretionary sectors were this week’s top performers. In addition, communication services and industrials lagged the broader market, with energy trailing all sectors this week. For the rolling one month, energy still holds the spot as the leading sector.

Strength in Small Caps

For the second week in a row, small caps, as represented by the Russell 2000 Index, were a top performer. Following November’s strength, the Russell 2000 is up over 8% so far for the month of December, leading all the major indexes and sectors as well. The performance of the energy sector is a close second, returning 7% so far this month.

LPL Research upgraded small caps to neutral this past September given that a likely new economic expansion was gaining some steam. For more of our thoughts on small caps, please read the Weekly Market Commentary, Three Reasons We Like Small Caps.

Fixed Income, Currencies, and Commodities

Bonds, as represented by the Bloomberg Barclays US Aggregate, finished fractionally lower for the week. The 10-year Treasury note traded lower as yields increased. Many bond sectors traded marginally higher this week. For the year, the Bloomberg Barclays US Aggregate is up over 7%. In addition, one of the bond index standouts this year is the Bloomberg Barclays Government Long Credit Index, which is up over 15% year-to-date, helped by its high sensitivity to falling long-term interest rates.

Oil’s Rebound

Commodities across the board performed well this week. Oil continued its streak of six consecutive weekly gains. The price of WTI crude this week reached over $49 a barrel on Friday, moving toward or above the marginal costs for many producers. Oil has rebounded from its April lows, but still has some work to do to reach the early January 2020 price of $63 a barrel. Natural gas also had a positive week and has returned over 30% for the last three months and over 20% year-to-date.

Silver, copper, and gold all moved higher. Silver returned almost 8% for a solid week. Year-to-date, all three metals are up over 20%; however, during the past three months, copper has been the only metal higher, up more than 15% for this time period.

US Dollar Down

The US Dollar Index (DXY) has depreciated over 10% since the market lows in March, making multiyear lows as recently as December 14. But there may be reasons to think this trend could continue into 2021 and beyond. For more of our thoughts on the dollar, please read the LPL Research blog, 4 More Years of Dollar Weakness?

US and International Economic Data Recap

The Federal Reserve (Fed) concluded its final policy meeting of the year on December 16. The Fed updated its bond purchase guidance and kept its policy rate unchanged. The Fed is currently purchasing $120 billion of Treasuries and mortgage-backed securities each month, expanding its balance sheet dramatically. For more of our thoughts on the Fed’s actions, please read the LPL Research blog, The Fed Reaches Into Its Policy Toolbox Again.

November’s retail sales declined for the first time in seven months, finishing lower over 1% month over month and missing Bloomberg expectations calling for a decline of 0.3%. October numbers were also revised lower, marking the first decline since March and April, and showing how rising COVID-19 cases and subsequent restrictions on economic activity are posing a threat to the recovery.

Weekly initial jobless claims rose 23,000 to 885,000 according to the US Department of Labor. This was worse than the Bloomberg consensus expectations of 818,000. Filings from the prior week were also revised higher from 853,000 to 862,000. The more comprehensive continuing claims beat expectations, however, declining to 5.5 million and exceeding Bloomberg forecasts of 5.7 million.

Looking Ahead

Economic data slated to be released the week of December 21 includes:

  • On Tuesday, we get final numbers on Q3 gross domestic product (GDP), December’s consumer confidence reading, November’s existing home sales, and December’s Richmond Fed Index.
  • Wednesday is all about December’s Michigan Sentiment, November new home sales, and November’s personal consumption expenditures and personal income.
  • On Thursday, we get data on November durable orders. In addition, Thursday provides investors with another weekly initial unemployment claims report.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All market and index data comes from FactSet and MarketWatch.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

This Research material was prepared by LPL Financial LLC.

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