Powell comments on interest rate cuts drives US Small and Micro caps

The indices were all strongly up on Friday after Powell signalled interest rate cuts. Market volumes remain relatively low reflecting the 'holiday' season. The VIX was softer at 16 - it hit 65 intraday on 5 August, its highest level since Covid in 2020.

DJIA +1.14%, S&P 500 +1.15% and Nasdaq +1.47%. On an equal weighted basis (our measure) the overall market was much stronger at +2.36% with breadth of 82% (vs 12% on 5 August and a high of the mid 80s% at the end of July) and daily volumes of 7.8b (vs the average daily volume over the last year of 7.9b).

One day returns as follows - equal weight basis: Mag7 +1.62% (NVDA +4.6%, TSLA +4.7%), large +1.31%, medium +2.1%, small +2.93% and micro +2.37%. On a 1 and 2 week equal weight basis; Mag7 +1.1% and +7.3%, Large caps +1.9% and +5.1%, Medium cap +2.8% and +5.9%, small cap +3.3% and +6.8% and finally Micro cap +3.9% and +7.3%.

On a weekly basis the market was flipping between favouring large caps to back to small/micro the following week. Our risk monitor remains in favour of the larger cap stocks but the benign Market is increasingly favouring Micro and Small. Micro Cap stocks had positive relative momentum four weeks ago, this reversed post release of the July nonfarm payroll figures. However over the last two weeks the Market has increasing favoured Small and Micro stocks, the one week differential has now reversed in favour of the Micro stocks at +2.1% with the gap increasing.

Over the last year US Micro cap stocks have underperformed Large caps by 33% so there is significant scope for the smaller end of the Market to catch up.