The U.S. stock market remains healthy, but recent volatility is beginning to wear. Investors are growing tired of constant economic whiplash and impacts from the trade war with China. However, there have been some signs of potential interest from both countries to find a way to make a trade deal. In part, this has helped alleviate recession worries – if it hasn’t happened yet, it probably won’t in the near future. Yet, the oscillation kept many sub-sectors of the market relatively stagnant. Small-cap equity indices moved sideways for much of the year. A degree of stability is now visible on the horizon, and that may lead to a resurgence in this market.
The first indicator of this possibility lay in active stock trading. While these active funds rarely outperform more passive indices, 2019 appears different. The stagnant market offered a rare opportunity for human-managed funds to overcome those that rely on computers. While data is readily available on larger-cap stocks, small-caps can sometimes fly “under the radar.” This is something that a human trader may spot. Without said data, an algorithmic trading system would have no means to invest.
Small-Cap Index: The Golden Cross
One of the best technical analysis indicators, the ‘Golden Cross’ represents a strong bullish sentiment. The signal appears when the 50-day moving average surpasses the 200-day. This occurred on the Russell 2000 Small-Cap Index in the past week. While the market remains sideways, this positive trend could signal an impending breakout.
These small-cap ventures offer larger potential gains, at a higher risk. For a positive uptrend, investor confidence in the economy must be solidifying. When there is fear of a recession, average investors will turn to larger-cap stocks that are more likely to weather the downturn. If a considerable drop is expected, these same investors might exit the market entirely.
Strength of the United States Economy
The U.S. economy relies on a stable government to avoid fear-based drops. The Trump Administration’s embattled trade policies make it difficult to predict these drops. While this initially caused frequent panic-sells, most investors have moved beyond the president’s occasional bluster. Despite that, some key indicators suggest that the economy is due for a slowdown.
In part, this sluggishness could be due to political turmoil. Abroad, China’s crackdown on Hong Kong represents a high degree of stress in a traditional economic powerhouse. Sparking protests and riots across Latin America may have less impact, but add to a growing global unease. Europe is similarly off-balance as the Brexit kerfuffle shuffles on with no end in sight. At home, impeachment proceedings hamper Trump’s efforts, and continue to be a source of uncertainty for the markets.
Article By: Adam Stone