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Russell 2000 Bests Nasdaq Rally, Bonds Plunge on ADP & PMI Data

Russell 2000 Bests Nasdaq Rally, Bonds Plunge on ADP & PMI Data

2020-06-03 18:05:00
Rich Dvorak, Analyst
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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.

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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

Russell 2000 Index Price Chart Stock Market vs Nasdaq Composite Performance

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.

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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

RUT Index Price Chart Russell 2000 Surges as Treasury Bonds Swoon

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.

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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

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