Closing Thoughts for the Week

Market breadth improved modestly last week to include some smaller stocks and cyclicals, but overall relative strength still belongs to the growth sectors. Softening consumer spending at the same time could mean that there’s no real support to be had for the global economy if something gets pushed over the edge. That “something” could end up being the Japanese financial sector. It’s interesting to see that investment-grade yield spreads are on the rise, all the way from AAA to BBB.

As expected, the markets saw increased volatility this week, particularly in the bond market. I’m not convinced that the disinflation trend has resumed given the volatility of data on a month-over-month basis and the fact that other data points aren’t really confirming the CPI number, but a lack of progress on the economic front could keep moving bond prices higher. I think that’s why we’re seeing the behavior in small-caps that we are.

Equity investors keep acting like inflation is control even though Treasuries were signaling caution. The strongest signal might be getting sent by small-caps. It can’t be understated how weak they’ve continued to perform relative to large-caps throughout this cycle. The signals are, at best, still mixed here.