Relative small-cap weakness and deteriorating credit conditions
Over the last half-year, and in particular since the beginning of 2016, the Russell 2000 small-cap equity Index has declined much more than the S&P 500 large-cap Index. This has coincided with deteriorating credit conditions as measured by widening corporate credit spreads (i.e., difference between corporate bond and Treasury yields) first emanating from the imploding energy sector.Tighter credit conditions have been a bigger negative for smaller US companies that have less favorable access to credit markets than a rising US dollar for larger more export oriented companies – suggesting that domestic economic concerns have become the main driver of recent US equity declines.
The key question going forward is whether corporate spreads will continue to widen as they did during the 2008/09 financial melt-down and small-cap continue to lead a general decline in US equities. (See our previous features – Cross-Market Links, Sector Dynamics, Mispricing Risk? and Speculative Dynamics).
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