- Smaller-cap stocks are showing significantly more weakness than their large-cap counterparts.
- Some utility stocks are beginning to improve as expectations for further interest-rate hikes ease.
- Presidential-cycle trends and S&P 500 seasonality could point to a stronger period ahead.
Markets may be approaching a more favourable seasonal period, but beneath the surface, investors are still dealing with a significant divide between large and smaller companies.
In this week’s Markets in Motion, StoneCastle Investment Management President Bruce Campbell examines market breadth, sector rotation, changing interest-rate expectations and the seasonal outlook for equities and crude oil.
This article is being disseminated on behalf of StoneCastle Investment Management, a third-party issuer, and is intended for informational purposes only.
One measure highlighted by Campbell shows 56.7 per cent of smaller stocks trading at least 20 per cent below their 52-week highs, compared with just 21 per cent among larger stocks. That points to a market increasingly concentrated by capitalization even as technology begins to reaccelerate.
Utilities have faced significant weakness, but Campbell identifies early signs of improvement among some individual names. That comes as expectations for additional US interest-rate hikes have eased. At the end of September, markets were pricing in approximately 1.5 further hikes by year-end; following the latest payroll data, that expectation has fallen to around one.
Crude oil could also play a role. Seasonal patterns point to a weaker period for oil from late October through year-end. Campbell suggests that if crude prices begin to deteriorate, easing inflationary pressure could further influence expectations for interest rates.
Meanwhile, the US presidential cycle offers another potentially supportive signal. Year two has historically experienced weakness heading into October, while year three has traditionally been the strongest of the four-year cycle. Combined with historically stronger S&P 500 seasonality later in the year, Campbell says there could be “light at the end of the tunnel.”
Watch the full episode above for Bruce Campbell’s latest look at market breadth, utilities, rates, crude oil and the seasonal signals shaping the months ahead.
