• Just when you thought mega-cap tech stocks were forcefully back in charge and the small-cap stocks’ rally was cooling, the stock market exacts its revenge. The Nasdaq 100 was sold off sharply at one point Monday, while the Russell 2000 suddenly surged. Then it reversed again, favoring tech.
• That’s an emotion-driven market in action. However, fundamentals matter, and they should win out in the end.
• Mega-cap tech may yet win this week’s performance derby thanks to earnings. According to Bloomberg, the “big five” – Facebook, Apple, Amazon, Microsoft, and Google-parent Alphabet – are set to report earnings growth that exceeds the broad market for the 12th consecutive quarter (is there any better definition of “growth” than that?!?). Three of those names report this week. 
• Tech is also getting a lift from the still-expanding pandemic, and the prospect of new health restrictions, conditions that made them darlings of last year’s V-shaped rebound.
• If it seems like all of a sudden the reflation and stimulus themes that were driving small-caps over mega-cap tech have gone cold – well that’s not quite true. Consider that the small-caps, as measured by the Russell 2000, outperformed the S&P 500 last week alongside the Nasdaq, and that both the Russell 2000 and Nasdaq 100 are ahead of the S&P 500 year-to-date.
• Where is Horizon Investments on the small vs. mega-cap debate? As active managers, we are picking our spots. We still like small-caps on valuations, favorable sector makeup, and the potential for a mergers and acquisitions boom plus stimulus spending. And we continue to see value in the tech-heavy NASDAQ, as a skinny Democratic majority shouldn’t be able to regulate their considerable advantages away. Where we are not favorable is large-cap growth and value. In our view, those areas don’t have the built-in advantages of the prior two, and we expect them to lag.  
• In bonds, the back-up in yield has lost its mojo. Inflation won’t be a problem anytime soon. And investors love to lock-in higher yields as was evident with auction buyers snapping up what was offered. Until the global fixed- income environment changes or inflation takes hold, any increase in Treasury rates will likely be slowed by a wave of foreign demand desperate for yield
  
  

What to Watch This Week

• Fed Chair Jay Powell’s Press Conference Wednesday – While no change in policy is coming, we are paying attention to Chair Powell’s press conference on Wednesday, especially his answers around the outlook for Fed purchases.  The Fed has fumbled communication around tapering twice already – can Powell thread the needle this week?
• Virus & Vaccines – Europe is extending lockdowns because of the new strains – will the U.S. be forced to follow in a few weeks?  Watch for Johnson & Johnson’s vaccine results, due any day now.  With only one shot, high production capacity, and a relatively simple supply chain, this could be a game changer, especially for much of the emerging world.

Related stories:
Buy the Rumor Sell the Fact Trips Up Markets
Only Two Words Matter to Markets: Stimulus Spending
January Could Make History with Small-Caps Leaving Large-Caps in the Dust
Bond Market Bears Growling as 10-Year Yield Breaks Through Important 1% Level
Horizon Investments’ Top Themes for the New Year
PIIGS Fly and Other Stories of Investors Reaching for Risky Bets
Momentum’s No Longer the Stock Market King, Vaccine Will Raise New Leadership
It’s Getting Harder to Fund Retirement Using Bonds
7.9 Trillion Reasons Not to Fight the Fed, ECB, BOJ or BOE

This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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