The trend is up and to the right. This Wall Street adage illustrates the bullish trend of appreciating asset prices. Looking under the hood, it is clear that investors are rotating capital in small and mid-sized companies.
The Russell 2000 Small Cap Index recently broke above a 9-month consolidation range. The below chart shows the iShares Russell 2000 ETF (Symbol: IWM) frustratingly trading between $210 and $230 since February 2021. Many companies in the index don’t generate profits and are riskier than better known blue-chip stocks. However, where there is a risk, there can be a reward. Small caps are generally more leveraged and may benefit exponentially to economic growth and be less impacted by potential corporate tax increases.
Chart Source: StockCharts.com
Small-cap stocks are not the only asset classes attracting buyers.
Other sectors such as semiconductors (symbol: SMH), transportation (symbol: IYT), and commodities (symbol: DBC) are outperforming the S&P 500. Over the last three months (August 16th, 2021 – November 16th, 2021), semiconductors are up +16.6%, while transportation is up +7.7%, and commodities are up +12% compared to the S&P 500’s +5.3% increase.
Commodities, which benefit from improving economic conditions, have been very strong as supply-and-demand conditions drive prices higher. Oil is trading in the mid-$80s and a move above the current level could set up a potential move to $100 (if not even higher). Natural Gas has doubled since April 2021, and coal has increased to a peak of roughly 300% in the last year, albeit pulling back over the last month. Finally, Bitcoin and Ethereum have both made high watermarks in the last week.
Chart Source: https://markets.businessinsider.com/commodities/coal-price
We couldn’t mention commodities without focusing on the energy complex. Let’s face it, the globe is energy-hungry and fossil fuel dependent even with the progress of renewable energies. Adding commodity exposure or focusing on countries with high commodity exports to your portfolio is one way to hedge against rising inflation. Australia is a prominent exporter of natural resources such as precious and industrial metals as well as energy (natural gas, coal, and petroleum). Canada and Mexico also benefit from higher energy prices. Ultimately, higher energy costs will constrain growth as consumers’ discretionary spending is cannibalized by funding gasoline, heating homes, and higher retail prices.