The Battle for the Hearts and Minds

The Battle for the Hearts and Minds

by Zach Marsh on Jul 9, 2021

This week we saw some pretty choppy price action for the major US indices. The large-cap S&P 500 was up about 0.50% for the week after today’s rally. The Nasdaq 100 finished the week up 0.73%. But the small-cap Russell 2000 was lower by -1.34%.

The battle between small-cap stocks and large-cap tech has been a big part of this year’s market action. From the Q4 2020 until Q2 2021 small-cap stocks had been dominating the Nasdaq 100. During this period, the Russell 2000 was up over 45% while the Nasdaq posted only a modest 13% return. Since that time, however, the Russell has been nearly flat while the Nasdaq has gained another 13%. In a broader sense, this battle can be seen as a proxy for the direction of our economy.

Should the Nasdaq continue to outperform the small-caps it would be an indication that the economy continues to be misbalanced, with money and power aggregated in the hands of the few. It would also be an indication that the momentary pick up in rates we saw up until May was just a short-lived phenomenon. On the other hand, if small-caps regain the upper hand we can extrapolate that the benefits of government action are not exclusive to the power structure. The outcome of this battle seems to have much greater consequences than just stock winners and losers.

For those who prefer an economy that spreads the riches out among the many, and I consider myself in that camp, the underdog small-caps should be your team. If, however, you prefer the Yankees, Duke, and the Patriots go ahead and root for the Nasdaq. I consider myself a fan of fairness, not necessarily equity. It is my belief that the Fed policy has been responsible for the divide between the haves and have nots. I don’t necessarily believe that the answer is expanded fiscal policy to combat the ills caused by runaway monetary policy. I believe if one simply took away the monetary stimulus we may find a more level playing field, without the headache of massive debt. But I’m not sure anyone who makes the decisions sees it my way. Therefore, only massive fiscal stimulus will tilt the scales in favor of the small-caps. Either way, if you want a barometer to measure societal shift over the next couple years keep an eye on the spread between the Russell 2000 and the Nasdaq 100.



Thanks for reading,

Zach and Dave





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