Markets Optimistic as Small Caps Outpace Large Caps
The HCM BuyLine® is positive and any pullback should be seen as a buying opportunity.
After five months of record-setting gains, the stock market pulled back in September, with the S&P 500 experiencing its biggest decline since the cyclical bull started on March 23rd. The market was vulnerable to a correction due to the most optimistic sentiment since before the crash, as well as economic, stock market, election, and seasonal cycles all pointing to a modest pullback, which we believe has just happened. 
The chart below shows the Russell 2000 iShares(IWM) rising above its 50-day average today after recently bouncing off its 200-day line. Small cap stocks are outpacing large cap stocks for a change. The rally in small caps during June took place while bond yields were rising. This month’s upturn in bond yields may be having a positive effect as well. Small cap stocks are closely tied to the domestic economy. Investors usually buy smaller stocks when they turn more optimistic on the economy, which is what higher yields may be signaling. 
The ISM Non-Manufacturing Index (NMI) increased 0.9 points in September to 57.8, above the consensus of 57.0, as service sector activity expanded for the fourth month in a row. Despite COVID-19 cases still rising, services growth accelerated last month after experiencing a brief lull in growth in August. Even so, in the absence of a widespread vaccine, the services sector remains vulnerable to downside risk. The combined latest readings of the manufacturing and services ISM indexes correspond to 2.9% annualized real GDP growth historically, a far cry from what’s needed to recuperate the COVID-related losses
Sixteen services industries reported growth, while only one contracted. Respondents’ comments were generally optimistic about business conditions and the economy. New orders rebounded 4.7 points to 61.5, while production picked up 0.6 points to 63.0. Employment moved back into positive territory for the first time since February. But at 51.8, the index remains well below the pre-pandemic level of 55.6. Supplier deliveries continued to normalize, while inventories shrank at a slower pace. The Prices Index fell 5.2 points to 59.0, but remained above its 12-month average, reflecting COVID-related shortages.
This week, Vance was interviewed by Bloomberg Radio. Click the link below to listen to the full interview.