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Yesterday's GDP report sparked discussions about the strength of the US economic recovery. If the US recovery is so robust, why are the small cap stocks, a key leadership group during an economic expansion, lagging so badly?
The Russell 2000, an index that tracks the largest 2000 small cap stocks in the US, has yet to climb above its 2018 high. The S&P 500, Nasdaq, and Nasdaq 100, indices dominated by technology, have all made new highs. The divergence between small cap and large tech stocks suggest risk aversion and weakness in the domestic and global economy.
John Murphy, a note technician of the futures markets, regularly suggests that armies (markets) lead by generals (mega cap stocks) rather than soldiers (small cap stocks) are vulnerable. The logic of the argument dictates that the soldiers, no generals, do the fighting. The small cap stocks do the fighting (dirty work) for the global economy. Small businesses employ a large chunk of the population, innovate and invent, and refresh corporations that constantly fail under their own weight and innovative inertia.
Russell 2000 ProIndex
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