Leaders-Laggards

Small-caps might have their greatest opportunity for extended outperformance in years. TIPS took a pause in the leadup to the election, but the noticeable move this past week could signal that the markets are taking inflation concern seriously. Long-term Treasury yields have given back almost all of their post-election rise, suggesting the bond market may finally be settling back down.

I’m starting to get really worried about what we’re seeing in the bond market, particularly with long-term Treasuries. I think bonds may have over-priced in the return of inflation (or possibly the likelihood of increased debt spending) and it’s eventually going to need to be corrected. There’s still no action from small-caps in either direction - no outperformance from a reflation trade, but no underperformance either.

The market is largely buying into the soft landing narrative, but we’re still not getting the corresponding uptick in small-caps. I’m still concerned about the issues within the credit markets being mostly ignored, which creates long-term opportunities in undervalued groups like this one. The overall Treasury yield curve is reverting higher, but I still think there’s more going on here.