SEEKING PROFITABLE PATHS

Investors in small cap stocks are feeling frustrated as the bull market in larger stocks continues into its third year, with the S&P 500 reaching historic highs. While the S&P 500 has surged 63% in the past two years, the small-cap Russell 2000 is still below its peak from October 2021, having only risen by 35% since October 2023. This disparity has led investors to seek alternatives, such as ETFs excluding unprofitable companies, in a bid to enhance returns. The conventional wisdom that small caps outperform large caps over time appears to be challenged by recent trends, with the S&P 500 outperforming the Russell 2000 in 12 out of the last 15 years. This shift in investor behavior is reflected in the increasing popularity of funds focused on profitability, such as the SPDR S&P Small Cap 600 and iShares Core S&P Small-Cap ETFs, which have shown better returns compared to traditional small cap investments. As a result, funds like Dimensional U.S. Small Cap and Avantis Small Cap Value ETFs are attracting strong inflows, indicating a growing preference for profitability-driven investment strategies in the small cap space.

OPTIMISM RETURNED

On Saturday, China’s Finance Minister Lan Fo’an announced plans to bolster China’s property market and hinted at increased government borrowing, and this sparked optimism among investors, and a rise of 1.9% in the CSI 300 index. The response from investors show that there is a positive shift in China’s stock market, and it is worth highlighting that there was a notable surge in property stocks. Moreover, it is important to acknowledge that although the exact details of the fiscal stimulus remain uncertain, market participants are hopeful that additional support will materialize, despite potential delays due to upcoming events like the U.S. election. Overall, the positive sentiment surrounding China’s economic outlook, along with the anticipation of policy support, has instilled confidence among investors, though lingering uncertainties may temper short-term market gains.

UPGRADE

Following the remarks from China’s Finance Minister, in which it was announced that 2.3 trillion yuan in local government special bond funds in the fourth quarter, and that there was an approval of 200 billion yuan worth of investment projects for next year by the National Development and Reform Commission, Goldman Sachs upgraded its forecasts for China’s economic growth in 2024 and 2025. The bank now predicts China’s GDP to grow by 4.9% this year, up from the previously estimated 4.7%, and expects a growth rate of 4.7% for 2025, up from the initial projection of 4.3%. Let’s highlight that China’s plans are aimed at meeting the target of around 5% GDP growth for this year and are anticipated to boost the economy next year, counteracting the negative impact of slowing exports and a declining property market. Nonetheless, Goldman cautioned that structural challenges persist in China, such as demographics, debt deleveraging, and global supply chain risks, which are unlikely to be fully addressed by the recent policy easing measures.

POSITIVE START

Bitcoin has started off the week on a positive note as its trading value is above $64,000 as of 8:00 AM CST. This positive momentum has been driven by hopes for a potential stimulus in China and increased demand for certain bitcoin-related assets. In addition, the upward movement also saw other major cryptocurrencies like Ether and Solana experiencing gains, while memecoins such as Mog and SPX6900 saw significant jumps over the weekend. Moreover, it is worth noting that the market sentiment turned bullish with over $100 million in short positions liquidated, although concerns remain regarding overpriced tokens backed by venture capital funds.

KEY EVENTS HAPPENING THIS WEEK

Monday: Bond market closed due to Columbus Day holiday. Speech from Federal Reserve Governor Christopher Waller.

Tuesday: Empire State manufacturing survey for October, and speech from Fed Governor Adriana Kugler.

Wednesday: Import price index report for September.

Thursday: Business inventories report for August, U.S. retail sales, retail sales minus autos, industrial production, capacity utilization, and Philadelphia Fed manufacturing index reports for September, home builder confidence index report for October, and initial jobless claims report for week ending on October 12.

Friday: Housing starts and building permits reports for September, and speech from Fed Governor Christopher Waller.