For those of you who would prefer to listen:
Threats of more tariffs and taking Greenland knocked stocks downward to start the week. In fact, the 2% decliner on Tuesday was the worst day since October. Those losses reversed with word about a semblance of a deal. It’s still not clear what that means. Wall Street rejoiced, for a bit. Perhaps more accurately, it breathed a sigh of relief. Stocks slipped into the weekend mixed. Those all-time highs are not far from here. But there is some built-up, underlying angst out there. It’s very understandable. Issues tend to not go away easily.
With so much attention around Davos and Greenland, a remarkable thing is happening within the Market. It’s found well below the surface. The Tech Titans have been taking a breather. As a group, they’re down this year while the rest of the Market is up. These 7 stocks still account for 1/3 of the Stock Market. Get this: Nvidia, the most valuable company in America, alone is larger than companies 201 to 500 in the S&P. In other words, the bottom 300 of the S&P 500 represent 60% of the stocks in the index but just 7% of the total value. It’s the underdogs that are driving this young year.
Even more impressive has been the move in Small Cap stocks. After underperforming by the widest spread to Large Caps in decades, Small Caps have finally found a spark. They’ve been the beneficiary of this great rotation. In fact, Small Caps have outperformed the S&P every day this year, until today, which ended that streak. And it’s quite healthy to see. It’s no longer the AI behemoths that are driving the rally. The torch has been passed. Given up for dead and not taken seriously, Small Caps are winning the day.
There’s also this: The Stock Market rallied back to erase much of the Tuesday decline. The Bond Market did not. The President has made it crystal clear he wants lower yields, which means lower rates. They’ve actually done the opposite. Yields keep going up. If you recall, when yields rise, bond prices fall. The reverse is true too. Another reminder, interest rates are the price of money. It is getting more expensive to borrow, which slows the Economy. And the price of America’s Treasuries has declined too.
Some of the rise in yields and Dollar weakness can definitely be attributed to the controversy over Greenland. The value of American assets certainly got shaken. But something else occurred that didn’t make top headlines. It took place in Japan, and it matters. It matters a lot.
The Bond Vigilantes erupted in Tokyo. The new Prime Minister called for a snap election. In her campaign, she is offering increased spending and lower taxes in order to stay in office. She’s only been there 3 months. The Asian nation is struggling to afford such a spending spree. Japan’s debt-to-GDP is already over 200%. The Yen currency has fallen nearly 60% against the Dollar since 2021. The yield on its 10-Year Bond is at a 30-year high. You may recall that Japan implemented negative interest rates a decade ago. It didn’t work. Japan is struggling to grow.
What’s happening in Japan is a warning sign for all economic powers. Excess debt without a plan to pay it back can be crippling. It’s only a matter of time. It’s not just a Japan issue. Europe, China and the U.S. have large debt obligations too. With over $330 Trillion, this is the largest global debt in history. And these countries own a lot of American debt. We mustn’t forget, debt is a 4-letter word. It’s finally starting to matter. After 30 years, the Yen carry trade seems to be coming to an end.
With this backdrop, it’s no wonder Gold keeps moving higher. The precious metal has gone from $4K approaching $5K in just 3 months. It’s up a whopping $500 since Christmas. There has been clear and aggressive buying.
India’s Treasury holdings fell to a 5-year low at $174 Billion. Delhi has been selling Treasuries and buying Gold. Poland has been the most aggressive buyer with a goal of getting Gold to account for 30% of its reserves. Gold does best when there are crises and uncertainties. Box checked.
Interestingly, cryptocurrencies have been weak. For most of these 2020s, Bitcoin was considered Digital Gold. In fact, its performance significantly outdistanced real Gold. That trend has definitely petered out. Crypto had been bid up by small Dollar speculators, with some institutional participation, while Gold has been bought big time by deep-pocketed organizations. Gold’s ascent has largely coincided with the Dollar’s decline. The Dollar usually rallies during periods of crisis. Not this time.
Natural Gas prices jumped over 70% this week. That is the biggest weekly move ever. I’ve said it before, ever is a long time. The massive storm across the country is the driver. Blizzard conditions are expected with a 2,000-mile stretch from Texas to Maine. It’s expected to impact 230 Million people, accounting for 2/3 of America’s population. People are told to stay home for the weekend. Roads will be closed. Southern states are generally not equipped to handle these frigid conditions which means roads could be closed even longer. Many goods and services won’t be accessible. Tens of Billions of Dollars in lost economic activity is expected. For perspective, the Texas Freeze in 2021 saw economic losses in the $150 Billion range. This weekend could be worse. Over 400 flights have been cancelled already. There could be as many as 4,000 over the weekend. This comes at a time when all the Airlines were expected to be profitable for the first time since before COVID. The winds have changed. Mother Nature is undefeated.
You know who else is undefeated? Those Indiana Hoosiers. The losingest program in College Football history is #1 in the nation. I still can’t believe I typed those words. The team lacked both the talent and money that the reigning kings of College football possessed. A new team won the national championship for the first time since 1996. Left in the dust were Alabama, Ohio State, Miami and Oregon. It’s kind of like the Small Caps overtaking the Tech Titans. Few to any saw this coming. Nobody gave them a chance. Except for those who mattered most.
The Indiana Hoosier story proves what an organization can do with strong leadership, a fresh mindset and a collection of aspirational, hard-working individuals coming together for a cause greater than themselves. These Hoosiers are not considered the most talented nor were they highly sought-after recruits. But they believed in their coach, who believed in them. It sure is something special to see. College sports have changed. The torch has been passed. Better yet, that torch was seized.
The Indiana momentum continued in the water too. Also under the radar, the #10 ranked Lady Hoosiers water polo squad went into foggy Fresno last weekend and knocked off #7 Fresno State and #8 UC Irvine. They are Back East presently, with a new #7 ranking, with plans to accelerate the momentum. A team of mostly California girls, underdogs in their own right, is proving another example that this Indiana way works. Important life lessons. It’s a good year to be a Hoosier.
Back to the Market:
Earnings Season kicks into high gear next week as the Tech Titans start reporting results. Expectations are still high despite the corrective price action. It’s been refreshing to see a broadening out with new leadership while Tech corrects. It’s good for the Market. But make no mistake, Tech is by far the leader in earnings growth. Nothing else compares. The torch will get passed back. That said, in the Market, as is in life, it’s about setting goals and beating those expectations. The greatest victories tend to come when you least expect them.
2026 just might be the year of the underdog. It’s certainly starting out that way. As someone who has always considered himself an underdog his whole career, I embrace this theme with open arms. It’s a really good thing.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
