On a day when the markets closed the week on a down note, President Trump announced a stunning result: in the second quarter, the American economy grew at an annualized rate of 4.1%. This figure nearly doubled the 2.2% growth rate that was seen at the beginning of this year.
Surely, if Trump wasn’t Trump – meaning if he wasn’t conservative and Republican – the mainstream media would have pumped this announcement in every channel and at every opportunity. And even with the vitriol against the current administration, the economic boost is impossible to ignore. But is this surprise robustness enough reason to buy into the very long-in-the-tooth bull market?
One major red flag against the constant optimism is the performance of the micro-cap index relative to benchmark indices, such as the Dow Jones. Between this year’s January opener up until April end, micro caps and the Dow Jones shared a strong correlation. Both sectors enjoyed a strong opening month before quickly collapsing into February.
From there, micro caps and the Dow became entangled in a frustrating consolidation phase.
However, it was during May that micro caps quickly found traction. For instance, the Zacks Micro Cap Index gained 6.4% between May 1st and June 29th. In contrast, the Dow Jones gained just over 0.7%.
But in this month, something interesting happened. Rather than the micro-cap index maintaining its momentum, it slipped quite badly. For the month so far, the Zacks index is down nearly 1%. On the flip side, the Dow Jones gained 4.7%.
What happened to the sudden role reversal? In my opinion, micro caps could be an early-warning signal; in this case, the divergence between micro caps and the Dow Jones indicates a breaking between sentiment on Main Street versus that of Wall Street.
Just consider the simple reality that the major blue chips today are often priced out of the average American’s pocketbooks. Certainly, if you’re an entry-level blue-collar worker, or are plying your trade in a field that doesn’t require specialized training or education, you’re more likely to find micro caps affordable rather than triple-digit blue chips.
Therefore, if regular folks find it difficult to buy stocks listed on a micro-cap index, eventually, the slowdown ripples into the broader benchmarks. Maybe not at first, because well-capitalized institutions can weather storms that micro caps cannot. But eventually, if investors aren’t buying at the lower levels, the upper levels can’t sustain themselves indefinitely.
A building is only as stable as its base. What we’re seeing today is a top-loaded structure whose foundations may be steadily deteriorating.