While the major market indexes continue to make new highs, the Russell 2000 index (RUT) shows signs that investors are once again taking an interest in small companies with growth potential. This is a typical reaction when investors perceive that larger companies are growing too slowly for their tastes.
The chart below details how small-cap stocks have broken above the nearly year-long channel they have maintained until the past week. The significance of this activity cannot be understated, since it implies that markets could well be on track to rise through the end of 2019 and beyond. This behavior shows that investors are actively seeking opportunities for investment growth. Under such circumstances, more investors tend to hold on to their investments, thus reducing volatility in the markets. Reduced volatility attracts more investors, creating a virtuous cycle.
U.S. Dollar Holds Top Position Among Major Currencies
While U.S. stock market indexes experienced an increase of volatility in their price action for 2018 and so far in 2019, at least some U.S. investors may have been scared out of the markets altogether and favored keeping their money in cash. Perhaps that is one explanation for why the U.S. dollar has maintained a largely dominant growth trajectory among major currencies over the past two years. When investors move out of stocks, it creates more demand for cash, in this case specifically U.S. dollars.
The chart below compares the U.S. dollar's relative value against several of Invesco's CurrencyShares ETFs that track various currencies. The Japanese yen is tracked by FXY, The Canadian Dollar is tracked by FXC, the British pound is tracked by FXB, the euro is tracked by FXE, the Australian dollar is tracked by FXA, and the Chinese yuan is tracked by Wisdom Tree's ETF with ticker symbol CYB.
Brexit Headlines Driving British Pound Higher
Although most of the major currencies have lagged behind the U.S. dollar in a longer time frame, in a shorter-term look, one currency, the British pound (GBP), has gained significant traction and has risen in relative value to the U.S. dollar. Ever since news of Boris Johnson's determined push towards Brexit took the forefront, the currency has trended higher. This makes it worthwhile for investors to consider whether the market, collectively speaking, actually prefers the Brexit outcome. If so, it would seem to imply that Britain's economic fate may be improved by the move.
The Bottom Line
While S&P 500 traded to another record-high close, the Russell 2000 held unchanged in a position that shows the index broke out of its lengthy price channel. This may portend a rise higher in the months ahead. The U.S. stock market's increased volatility may have driven some investors to cash over the past two years, helping fuel the rise of relative value in the greenback compared to other currencies. In recent months, however, Brexit headlines have helped the British pound surge higher.
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