RUSSELL 2000 INDEX PRICE OUTPACES NASDAQ GAINS, TREASURY BONDS NOSEDIVE AS REFLATION TRADE ACCELERATES ON ADP JOBS & SERVICES PMI DATA
- Russell 2000 soars as mid-cap equities outperform large-cap technology stock stalwarts
- RUT Index price action extends its recovery to 47% since stocks bottomed mid-March and compares to a 39% gain notched by the Nasdaq
- Bonds and gold prices tumble as the 10-year Treasury yield spikes sharply in response to better-than-expected ADP Employment Change and ISM Services PMI data
Investor risk appetite continues to bulge and push the stock market higher. The ongoing ‘V-shape’ recovery put forth by stocks and the US economy has helped fuel a steep rebound in major US equity indices while improving sentiment crushes volatility. Since the Fed announced unlimited QE on 23 March, the S&P 500, Dow Jones, and Nasdaq have gained about 35% on balance.
Broadly speaking, large-cap growth companies have bested their large-cap value counterparts amid unprecedented central bank balance sheet growth with the FOMC printing press on full blast. At the same time, the Russell 2000 Index, a benchmark for mid-cap stocks, has climbed nearly 50% off its swing low. Since stocks bottomed mid-March, Russell 2000 performance, though down about 15% year-to-date still, has outpaced the tech-heavy Nasdaq, which now trades within 1% of its all-time high.
Learn More – Differences Between the S&P 500, Dow, Nasdaq
RUSSELL 2000 INDEX PRICE CHART: MID-CAP STOCKS OUTPERFORMING NASDAQ SINCE MARCH BOTTOM
Chart created by @RichDvorakFX with TradingView
Positive tailwinds from a Fed policy tweak to its municipal lending facility program stands out as a primary driver of recent outperformance recorded by the RUT Index against to the SPX, DJI or NDX. Mid-cap stocks have also soared largely on the back of sustained coronavirus optimism as lockdown restrictions on business activity are lifted and much-needed stimulus reaches relatively smaller business.
As bearish investors capitulate and exacerbate the stock market recovery trade by covering short positions, there is potential for a prolonged rotation of capital out of safe-haven assets into equities, which could help steer the Russell 2000 higher.
RUT INDEX SOARS AS TREASURY BONDS SWOON, 10-YEAR YIELD SPIKES
Chart created by @RichDvorakFX with TradingView
Also, improving economic data, such as better-than-expected ADP Employment Change (a precursor to NFP) and ISM Services/Non-Manufacturing PMI data that crossed the wires earlier today, offer encouraging evidence that the sharpest economic downturn in modern history is behind us.
The latest ADP and ISM reports appear to have sparked a major selloff in anti-risk bonds as the US 10-Year Treasury yield spikes above 0.75% to an eight-week high. Nevertheless, equities still face material downside risks that might spark a major reversal back lower.
For instance, stock market bulls have peculiarly overlooked threats from US-China tension escalating, double-digit unemployment rates still rising, and George Floyd protests turning into riots, which likely bode poorly for broader consumer confidence and spending. Correspondingly, there is still a notable possibility that stocks face peril as day of reckoning looms.
-- Written by Rich Dvorak, Analyst for DailyFX.com
Connect with @RichDvorakFX on Twitter for real-time market insight
