The DJIA, S&P 500 and Nasdaq continue to climb to records ... but there are some early warnings that trouble lies beneath:
A stock-market index of small caps is at its weakest versus the S&P 500 since the financial crisis, suggesting the market has a liquidity problem.
On Thursday, the S&P 500 rose 0.2% to a record close, while the Russell 2000 fell 0.5% to close 10.5% below its record, which was reached back in August 2018.“Small caps are more sensitive to liquidity issues, both good and bad,” said Tom McClellan, publisher of the McClellan Market Report, in a recent research note. “They are like the canaries in Great Britain’s coal mines during the 1800s, birds who were more sensitive to bad gases than the big burly coal miners.
Small-cap underperformance is coming at a time when many feel the biggest headwind for the stock market and the economy is all the uncertainty surrounding the U.S.-China trade war, which should weigh on large-cap multinational companies more than small-cap companies that have more domestic exposure. The iShares iBoxx USD High Yield Corporate Bond exchange-traded fund HYG, -0.05% tracks the performance corporate bonds that credit-rating firms have rated as speculative, or “junk.” When liquidity is flush, the higher yields offset the risk of default, but when money becomes scarce, investors tend to shy away. Read more about how junk bonds’ relative weakness in late 2015 preceded the 2016 selloff.
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