Pre-Pandemic VIX Levels, Small-Cap Strength and Campbell Soup

The Russell 2000 Crushes the Nasdaq Once Again

Small-caps showed even more strength as the Russell 2000 went up almost 2% on the day. In fact, we predicted this might happen: Yesterday we talked about how small-cap strength could be the next big trade and, sure enough, the big jump in the iShares Russell 20000 ETF (IWM) on Tuesday saw the third highest call volume in history – an extremely bullish development. And this bull is likely to have some staying power; the last two times we saw this was at the end of 2009 and end of 2012. In both those instances, the small-cap index continued to run for months afterward.

But, for every winner, there’s a loser…

Meanwhile the rotation continues out of the tech-centric Nasdaq. Popular headline-grabbing stocks like Microsoft Corp. (MSFT), Nvidia Corp. (NVDA), and Alphabet Inc. (GOOGL) were down anywhere from 3% to 3.8%. Yesterday’s sell off in tech, like the smoky haze that blanketed the East Coast, came down from Canada, where the Bank of Canada unexpectedly hiked interest rates. This rattled a lot of investors who (incorrectly) reckoned we’d seen peak interest rates. But, in all fairness to BoC governor Tiff Macklem, these stocks were frothier than a shook-up bottle of Elsinore; they packed on more than $4 trillion in market cap in less than six months.  

In fact, we’re nowhere near certainty when it comes to interest rates…

To Hike or Not to Hike? The Fed’s Ultimate Conundrum

Every day paints a conflicting picture of inflation data and yesterday was no different. The Manheim Index, which tracks used car prices, fell 2.7% in May, pushing the yearly decline to 7.6%. A decline in American used-vehicle prices could help offset worry about sticky inflation in other area, potentially boosting risk assets.

On the other hand, the latest results from food manufacturer Campbell Soup Co. (CPB) showed they were able to push prices 12% higher in the first quarter, compounding concerns around sticky inflation. Higher food prices have been with us for a long time, which could also put the Fed in a position to raise rates.

While the chance of no rate hike has dropped from 91.5% a month ago to 70.1% today, these are still betting odds and the decision could go either way.

The VIX Is Back to Pre-Pandemic Levels

The CBOE Volatility Index, the VIX, is a real-time measure of the expected volatility of the S&P 500 over the next 30 days, and it continues to drop. Now below 14, it looks to be bringing back happy memories of the pre-pandemic bull market. But whether it can last is a different story.

The Fed’s rate path is still uncertain. The U.S. Consumer Price Index (CPI) will hit the street next week, along with minutes from the Fed Open Markets Committee (FOMC)… and that street will be running through a deeply unsettled global political environment. With that said, the last time we had a major VIX streak above 14 ending late 2012, the S&P 500 gained almost 20% in the next year. Investors could be feeling optimistic; they may well feel like betting the Fed will pause rate hikes this month.

According to Garrett Baldwin, value stocks are also breaking out, which is helping the market to find some semblance of balance versus only a handful of stocks driving the stock market. This is going to be one of the most important trends this year and one we will be continuing to watch as the trade plays out over the next few weeks.