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Macro Perspectives

• Wall Street rose on Wednesday, recovering from losses in the previous two sessions.

• The blue-chip Dow surged 478 points, driven by strong performances from Apple and Intel.

• The Nasdaq added 0.4%, held back by losses from the AI giant Nvidia.

• Investors were awaiting comments from Fed Governor Waller later in the evening, as well as the PCE inflation report due on Friday, for insights into the timing of interest rate cuts.

• The top-performing sectors were utilities, real estate and industrials, while the technology sector underperformed.

The stock market rally broadened, with the equal-weighted S&P 500 and the Russell 2000 (small caps) leading the way - representing broader stock market strength.

Building on our discussion in my note yesterday, the Fed’s Financial Conditions Index had a turning point in October, from an historically tight level. That turning point was triggered when Jerome Powell verbally signaled the end of the tightening cycle - turning points from levels of historically tight financial conditions have been good for stocks in the subsequent 12-month period . . . especially for small caps.

With that, as the major U.S. stock market indices have been routinely making new record highs, the proxies for broader stock market confidence and demand have been lagging. The equal-weighted S&P 500 printed new record highs earlier this month (finally recovering the losses of the past two years). But the Russell 2000 (small caps) remains ~14% away from the 2021 record highs.

We’ve talked about the opportunity for small caps, the laggards, to catch up to the performance of the major indices. The good news, yesterday the Russell traded to the highest level since January of 2022.

With the P/E on the S&P 500 running north of 20, which is historically high, there remains plenty of deeply undervalued stocks for investors to suss out. That bodes well for the chart above to continue narrowing the losses against its 2021 record highs and to narrow the divergence in this chart following the March’23 Bank Shock. . .