What an extraordinary run.
The Dow Jones Industrial Average has hit another record high this week. It has closed above 19,000 points three days in a row.
Less than eight years ago, the Dow traded at a low of 6469 points.
Today, it’s 194.9% higher.
Amazing. The issue now is whether these gains will last…or whether this is merely the final blow-off rally before an almighty collapse.
Investors often look for reasons why a market moves.
Once they think they’ve found a reason, they’ll figure out if it’s a ‘causal’ or ‘casual’ relationship. In other words, did the market rise because of this (causal), or would it have risen anyway (casual)?
They then look further. They look at the correlation. Simply put, how much of the market’s movement is due to a particular event? Is it the sole reason, or are there other factors?
It can get quite complicated. And different investors will have different views on causal, casual, and correlation.
But in this instance, with this stock rally, there can’t be any doubt. It’s 100% causal. And there’s a 100% correlation: Donald Trump.
Big-caps out, these ‘caps’ in
Check out the chart of the Dow below, you’ll see the big spike since the US presidential election:
[Click to enlarge]
The arrow pinpoints Trump’s win.
It’s not just in the US where markets have bounced. After initially falling on the result, the Aussie S&P/ASX 200 index has surged more than 400 points.
That’s a big move, too.
But what isn’t such a big move is the performance of another key stock index, the S&P/ASX Emerging Companies index. This index contains 132 small-cap Aussie stocks.
Since Trump’s win, this index has resumed its downward path. Check out the chart below:
[Click to enlarge]
The index initially fell on Trump’s win. The next day, as the US market rebounded, this index followed suit. But, since then, it has given back the gains.
The Emerging Companies index is now trading back near the lows immediately following the Trump win.
What does that tell you?
You can read a couple of things from this. First, you could say that these tiny stocks reveal the real view of the market. Investors have piled into the perceived safety of blue-chips, but they aren’t willing to take on extra risk — just in case the Trump win ‘honeymoon’ period comes to an abrupt end.
The second way to look at this is as a sign of opportunity. Investors have bought up all the big-cap stocks as world markets recovered. Meanwhile, they’ve so far ignored the market’s tiny stocks.
If you’re a speculator, that should get your attention. If the market rally continues, there’s little doubt in our mind that investors will shift towards riskier assets — such as small-caps.
When, or if, they do, it could create big opportunities for investors who get in now.
Remember, blue-chip stocks are relatively high, and the prospects of big dividend increases are fading fast.
If investors want to supplement lost income growth due to stagnating dividend yields, it’s fair to say they could start looking for capital growth instead.
And, in our view, when it comes to capital growth, there are few better places to find it than in the tiny end of the market: small-caps.
This could be where you’ll find the market’s next major growth spurt.
For Markets and Money
PS: Sam Volkering, our small-cap expert, has recently profiled his top ASX small-cap picks. For details, go here.
Publisher’s Note: This article was originally published in Money Morning.