Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.
Over a 12-month horizon, we now believe a U.S. recession is very likely, but aren’t confident enough to make the call when the forecast window is cut in half. Second-half stock returns could be decent if the business-cycle peak is still a year away. Then again, there’s peril in waiting for “too much” confirmation of recession.
The U.S. economy and blue chips have shrugged off the risk of the worst trade war since 1930’s Smoot-Hawley Act, while comparatively few stocks on either the NASDAQ or the NYSE have broken out to 52-week highs. There’s also the troubling talk of the Fed having tamed “the cycle.” Should investors bet on a potentially wild (but narrower) final melt-up over the next 6-12 months? We don’t like the odds.
We thought Jerome Powell’s “Christmas Capitulation” would be tough to beat, but he accomplished that two days ago with what could be called his “Spring Surrender.” That, in turn, has rekindled hopes of a stock market melt-up along the lines of 1998-99, which, as old-timers will remember, followed a late-cycle correction that was nearly identical to the one seen last year.