We’ve been bullish on U.S. stocks for more than 9 months. But all domestic equity markets are not created equal. The outlook for the small-cap Russell 2000 is bearish.
“That’s another big callout,” says Hedgeye CEO Keith McCullough in the video above, his response to a subscriber’s question on The Macro Show today about our proprietary risk ranges. “Power users of Hedgeye would note that not only is the trend bearish in the Nikkei, the DAX, the Spanish IBEX, and the CAC 40 in France, it’s also bearish on the Russell 2000. There are a lot of things to be concerned about in the U.S. stock market.”
Why are we so concerned about the small cap index?
Interest rates are falling and the Financials are less profitable in this environment because they make money off the spread between long-term and short-term rates by borrowing short and lending long. Financials have a 26% weight within the Russell 2000. “So when bond yields go down, the Russell’s not going up certainly relative to the Dow and the more internationally oriented S&P 500,” according to McCullough.
Watch the video above for more on why we don’t like the Russell 2000 right now.