Investors have turned away from a key part of the stock market. Here’s why.
Happy Friday Eve #HappyFridayEve
Happy Friday eve, readers. Phil Rosen here — it’s been a busy few days in financial news with Tesla’s shareholder meeting, choppy markets, and of course more debt-ceiling meetings.
But those talks in Capitol Hill are just that — talks.
Wall Street has effectively dismissed any chance of a US default, shrugging off the impasse as political brinkmanship that ultimately won’t ignite catastrophe.
Regardless of what happens, investors have already been positioning for economic sluggishness.
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1. Investors have pulled $8 billion from small-cap stocks in just two months. This pocket of the market, according to Jefferies analysts, has bled out through exchange-traded funds.
Tighter lending standards for banks — as a result of Fed rate hikes and recent bank failures — have made investors wary of what comes next for the broader economy.
Small-cap stocks, which make up just over 4% of the equity market, tend to perform worse than their larger counterparts in the run-up to a recession, which the Fed expects to begin later this year.
In 2023 so far, the Russell 2000 small-caps index has gained about 0.3%, while the large-cap S&P 500 has seen a 7% jump.
“Credit is going to be challenging for smaller companies and more costly,” Jefferies analysts wrote in a note Wednesday.
Only two months ago, Silicon Valley Bank collapsed, and Signature Bank followed shortly after. That triggered billions in outflows from other small- to mid-sized banks.
But to Jefferies, the banking crisis isn’t systemic, and even though credit is harder to come by now, and debt levels at smaller companies are higher than average, balance sheets are still in better shape with more cash today.
To be sure, Americans are feeling less and less financially secure in the current landscape.
A new poll showed that half of Americans have taken steps to cut back on monthly bills, and are dining out less often to save money.
Those revised spending habits, per a report from the Country Financial Security Index, stem from the Fed’s tightening policy and fears of a recession.
As of May, 70% of respondents said they are keeping cash on hand, given the current economy.
Others reported cutting back on shopping for clothes, driving less to save on gas, and switching to cheaper service provider plans or canceling streaming subscriptions.
How have your spending habits changed over the last month? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
In other news:
2. US stock futures rise early Thursday, as investors await the weekly jobless claims report to measure the strength of the labor market. Meanwhile, the Philadelphia Fed’s manufacturing survey numbers for May are also due out later today. Check out the latest market moves.
3. Earnings on deck: Walmart, Alibaba, and Charles Schwab, all reporting.
4. This CIO helps oversee $100 billion. He said the mega-cap tech elite responsible for broad stock-market gains this year are more at risk than most people think. These are the three areas he likes in equities for both the near- and long-term.
5. China’s yuan dropped below a key dollar level for the first time in 2023. Hopes of a big post-pandemic rebound for the Chinese economy are sputtering, and it’s showing up in the currency. Full details.
6. Bitcoin just received a vote of confidence as Tether announced it would buy more of the token to back its stablecoin. Starting this month, Tether said it would allocate up to 15% of its net realized operating profits toward buying bitcoin. It revealed just a week ago that it already holds $1.5 billion of the world’s most popular token.
7. Commercial real-estate prices could tumble 10% from their peak and defaults are sure to increase, Moody’s chief economist said. Higher interest rates, a credit crunch, and waning demand for office buildings are all working against the sector, in his view. Read more.
8. Seasoned real-estate investors agreed that buying a multi-family property is a great entry-level investing approach. If you want to own real estate, this is a sure-fire way to get your start, according to experts. They broke down how rookies can afford to buy one.
9. A 30-year market veteran and portfolio manager explained why regional US banks are in good shape after recent failures. Those names could actually be real bargains, Manulife’s Susan Curry said. Here are the five bank stocks to bet on now.
10. Google parent Alphabet rejoined the $1.5 trillion valuation club. The tech giant’s stock has rallied on its AI efforts, and it surpassed the key threshold for the first time since May 2022. Microsoft, Apple, and Amazon round out the list of other club members.
Curated by Phil Rosen in New York. Feedback or tips? Tweet @philrosenn or email prosen@insider.com.
Edited by Max Adams (@maxradams) in New York and Hallam Bullock (@hallam_bullock) in London.