Impact Capital’s quarterly research report seeks to highlight the latest developments most relevant to your investments and financial planning. In this installment of Three Market Themes, we focus on the elevated price of Large Cap U.S. stocks, the surprising performance between Small Cap Value and Large Growth stocks, and the inverse correlation between the U.S. Dollar and Emerging Market stocks.

1. Large Cap U.S. Stocks Hitting Resistance?

One of the indicators we use to highlight extremes in the markets are price-based bands. Looking at a monthly chart of the S&P 500, the stock price recently touched the top band. Looking back on times when this happened before, most of the time prices were repelled when they climbed these heights. In 2013, the price move was a sign of strength that continued until 2015. At a minimum, we are rebalancing portfolios and using ETFs with downside protection.

2. Small Cap Value Takes the Lead

Since the March 2020 low point, small cap value stocks (represented by IWN in green) have outperformed large growth stocks (represented by IVW in blue) by 18%! This seemed unlikely in early September, when large growth stocks were ahead of small cap value stocks by 15%.

In a blog titled It’s Mean Not to Revert published in July 2020, we explained why small cap value stocks were great “buy low” candidates as long-term trends correct short-term excesses.

3. Dollar Weakness Leads to Emerging Market Gains

Major turning points in the U.S. Dollar (USD) has lead to major turning points for Emerging Market stocks (shown in blue). Since non-U.S. investments are held in local currency, they benefit when the USD falls.

From a short-term perspective, Emerging Market stocks look extended, but when contrasted with a longer-term perspective, they have not made much progress since 2018. All things considered; we remain constructive on Emerging Market stocks if the price stays above the 2018 high point.