Small Caps Beginning To Exhibit Weakness

The family drove from Ohio to the Outer Banks and if the traffic on the way there, as well as activity on OBX has any economic significance, the economy is strong.

Confirming this strength were a few economic reports last week, durable goods and GDP. Although the headline durable goods orders of 1.0% missed expectations of 3.2%, strength was seen in core capital goods and unfilled orders. Core capital goods rose .6% and exceeded the .5% consensus expectation. Overall this is a strong report. Then on Friday the advance estimate of second quarter GDP was reported at an annual rate of 4.1%. The last 4%+ GDP print was Q3 2014 when the rate was 4.9%. According to the Commerce Department on the Q2 2018 GDP report, "The acceleration in real GDP growth in the second quarter reflected accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending. These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decelerated." The weak economic report for the week was a miss in the existing home sales report which have now been soft for three consecutive months. This is something to keep an eye on.

From an equity market perspective, it seems the market moving event was the earnings report by Facebook (FB). For large cap U.S. stocks, the S&P 500 Index has now closed up for four consecutive weeks. On a monthly basis, the S&P is working on a four month winning streak as well. This move higher in the S&P 500 Index is placing the index near resistance of the market's late January high.

What has worked better than the S&P 500 Index though has been small cap stocks. The below charts shows the year to date 2018 performance of small caps as measured by the iShares Russell 2000 Index ETF (IWM). This year the small cap index is up 9.0% versus the S&P 500 Index total return of 6.6%. Much has been written about the large cap technology issues driving performance and with that the equal weighted S&P 500 Index is up only 4.6%.

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