Pro Perspectives 6/7/23

June 07, 2023

We looked at this chart early last week …
The big-tech driven Nasdaq was outpeforming the broader small cap market by more than thirty percentage points on the year. 
That gap is closing aggressively, helped by the nearly four percentage points of outperformance today, by the Russell 2000.  
What's going on?
We've had a market that has been positioned for a hard landing, bearish outcome.  And yet, the overhang of risks have been removed one by one.  
>Debt limit decisions are now, not only pushed out to 2025, but the Treasury now has license to issue unlimited debt between now and then (a greenlight, if given an excuse).
>By next month, we should be seeing a headline inflation number in the mid 3s (percent), thanks to the "base effect."  And that has the Fed chattering about a "skip" in the rate hiking campaign (otherwise known as "pausing," more likely ending).   
>The bank shock has proven to be just that:  a shock, not a crisis. 
That said, there was news yesterday that the Fed may be looking to hike bank reserve requirements by 20%.  The last time I checked (still here), they took the reserve requirement to zero, during covid, and haven't changed it since.  That gave banks a license to make unlimited loans.  While twenty percent of zero is still zero, perhaps its a signal that the Fed is cleaning up some bank risk.
So, with risks being removed, the investors that have been positioned on the wrong side this year (which includes underinvested in equities), seem to be buying the market laggards.
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