The large capitalization S&P 500 Index (SPX) has soared to new record highs, up by 7.0% for the month through the close on June 24, while the small cap Russell 2000 Index has advanced by 4.4%. The buying action in stocks reflects a resurgence in TINA, the view that "There Is No Alternative (To Stocks)" given that the yield on the 10-Year U.S. Treasury Note has dipped below 2% and the futures market is forecasting at least two more interest rate cuts by the Federal Reserve in 2019, per a column in The Wall Street Journal.
“We don’t see ourselves in a recessionary environment yet, so we’ve got to stay invested,” Fiona Frick, CEO of fund management firm Unigestion, told the Journal. Over the past year, larger, less risky, and more liquid stocks have been investors' favorites, per another Journal report. From the close on June 22, 2018 through the close on June 24, 2019, the S&P 500 has gained 7.3%, while the Russell 2000 has fallen by 9.2% of its value and the iShares Microcap ETF (IWC) has plummeted 16.6%.
The big themes surrounding the recent market action are summarized in the table below.
- Low and falling bond yields are making stocks the only viable investment option.
- This viewpoint is called TINA, shorthand for "There Is No Alternative (To Stocks)."
- Large cap stocks, with higher liquidity and lower volatility, are favored over small caps.
Significance For Investors
Small cap stocks tend to have significantly less international exposure than large caps, making them generally less vulnerable to unfavorable developments in the area of trade, such as tariffs imposed or threatened by President Trump, or the negative impact of a rising U.S. dollar on the reported earnings of U.S. companies with overseas operations.
However, small caps tend to be more volatile, and are at greater risk if the U.S. economy decelerates more quickly than overseas markets, per the Journal. Another reason why the resurgence of TINA sentiment is not propelling small caps is that the leading growth stocks are among the largest of the large caps, including mega cap names such as FAANG members Facebook Inc. (FB) and Netflix Inc. (NFLX), up by 46.9% and 38.6% year-to-date through June 24. Investors chasing growth with these stocks are adding to performance gap between the S&P 500 and the Russell 2000.
Meanwhile, Brian Moynihan, Bank of America's CEO, is among those who see low odds of a U.S. recession in the near future, while acknowledging that growth is slowing. “The debate is whether [U.S.] GDP growth flattens out at 2% or goes lower,” he told Barron's, which notes that inflation-adjusted real GDP grew at an annualized rate of 3.1% in the first quarter of 2019. “Everything we see in our customer base is consistent with a slowdown to 2% and a flattening out from there,” Moynihan said.
Pessimists see rising TINA sentiment as a bearish indicator, given the persistence of key macro risks such as trade policy and a global economic expansion that appears to be past peak. While TINA is not quite the same as irrational exuberance in the stock market, the bears will point out that it also can send stock prices to excessive, unsustainable levels that are bound to be followed by a nasty fall.