What effects might we expect from this underperformance of small cap stocks? While there are many, there are two we would like to highlight:
1) It would seem to suggest a stronger Yen, and
2) It would seem to suggest the continued relative outperformance of counter-cyclical stocks (companies from the utility, telecom, health care and consumer staple companies).
In the first chart, we overlay the relative performance of small-caps vs. the S&P 500 and the Yen/USD exchange rate. Perhaps the Yen reverts into a stronger trend rising into the 90s vs. the USD.
In the second chart, we overlay the relative performance of the S&P 500 vs. the S&P 600 compared the relative outperformance of counter-cyclical sectors to cyclicals sectors in the MSCI World index. Because of the 92% correlation between these variables, the new leg down in small-caps potentially telegraphs the continued outperformance of counter-cyclical sectors.