Wall Street Week Ahead: Small caps join market rally but pandemic could derail them

In this news, we discuss the Wall Street Week Ahead: Small caps join market rally but pandemic could derail them.

NEW YORK (Reuters) – U.S. small caps joined the big market rally in the days following election day, with investors weighing the likelihood of a divided Washington, Democratic President Joe Biden and Republicans retaining their majority in the Senate.

Still, some investors and analysts have warned that small businesses could lose momentum as the coronavirus pandemic shows no signs of slowing down. Foremost among their concerns: that small caps will bear the brunt of any aggressive measures Biden may take to tackle the pandemic, without the benefit of a big stimulus bill if Senate Republicans block his efforts there.

Democrats could still take control of the Senate if Georgia’s two contested seats end in January, as is now expected. This could lead some investors to reconsider the possibility of spending bills that would benefit small caps.

However, small businesses will likely continue to bear the brunt of the pandemic, which is reaching record levels in the United States.

“A more aggressive response from Chairman Biden could be a risk for small caps,” said Sylvia Jablonski, CEO of Direxion.

“The best scenario for small caps is a complete reopening of the economy with manageable levels of Covid before a vaccine comes out and some form of stimulus with a favorable Fed. Worst case is a lot less stimulus than we were hoping for with a full stop or something close, ”she said.

These concerns are reflected in the underperformance of small caps since election day. The Russell 2000 Small Cap Index is up 2.6% since November 3, just over half of the 4.2% gain in the S&P 500 Large Cap Index over the past year. same period. The underperformance mirrors that of the past five years, in which the Russell is up 38.2% against a 67% jump in the S&P 500.

U.S. coronavirus cases rose by more than 120,000 on Thursday, according to a Reuters tally, the second consecutive record daily increase as the virus spreads to all parts of the country. Twenty of the 50 states reported record increases on Thursday.

The increase in the number of cases in Europe has led to the reinstatement of economic lockdowns and other restrictions there. France, Germany, Italy and the Netherlands announced new restrictions, while British lawmakers voted for a one-month lockdown.

“The implications of the ongoing second wave of COVID-19 in Europe and the third wave in the United States remain uncertain and the results of vaccine trials by the end of the month remain an important catalyst,” wrote analysts at Barclays in a note Thursday, recommending investors stay protected against a sharp drop in US small caps.

Small caps may remain volatile in the week ahead as Congress resumes negotiations on a stimulus bill. Senate Majority Leader Mitch McConnell hesitated to pass a $ 2.2 trillion bill backed by House Democrats, but said on November 4 that he was open to some support for state and local governments backed by Democrats and that it was “necessary to do so by the end of the year.”

The progress of stimulus talks and the number of coronavirus cases will likely dictate the trajectory of small-cap stocks in the coming weeks, as Biden will not take office for two months, said Esty Dwek, head of market strategy. worldwide at Natixis Investment Managers.

Biden won’t want to “spend political capital trying to lock down the country or trying to get people to follow a national mask mandate that would be extremely difficult to implement,” she said, making the risk of “minimal” large-scale economic foreclosure. .

Small caps could start to outperform again in 2021 as the number of new cases declines and vaccines and other treatments become available, she said.

“We’re going to start thinking about reopening the business again and getting past the virus,” she said.

Reporting by David Randall; Edited by Ira Iosebashvili and David Gregorio

Original © Thomson Reuters

Originally posted 2020-11-06 11:36:11.

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