Why December's Small-Cap Rally Might Not Last

People walk past a Christmas tree at the New York Stock Exchange.

ANGELA WEISS/AFP via Getty Images

Small-capitalization stocks are on fire, but they might not stay that way for long.

Early in 2020, amid global pandemic, investors piled into the largest stocks, feeling safest in names such as Apple and Microsoft. Stock in those two firms, along with, Amazon.com, Facebook and Google parent Alphabet, are up almost 50% this year on average.

But with vaccines rolling out, investors are rolling the dice on stock in smaller companies. The Russell 2000, an index of small-cap stocks, is up 5.2% so far in December. That’s the best start to a December since 2010, according to Dow Jones Market Data. December’s strong start comes after a record-setting November for the Russell 2000.

That small-cap index has risen almost 27% in the fourth quarter. The large-cap Russell 1000 index is up less than 10%. The recent rise in small-cap stocks has wiped out their year-to-date underperformance compared with their large-cap cousins.

The Russell 2000 now trades at almost 31 times estimated 2021 earnings, a 40% premium to the 22 times PE ratio of the Russell 1000. Small-cap stocks often trade at a premium to large-cap names—it’s easier to grow from a smaller base. But 40% is high, even for the Russell 2000.

Valuation could be a problem, but investors don’t wake up and, collectively, decide to sell a group of stocks because of relative PE ratios. This is only a word of caution—and an opportunity. Large-cap stocks are looking more attractive again.

Al Root

*** Nominations are now open for the 2021 Most Influential Women in U.S. Finance list. Submit a nomination here by Dec. 31.


Electoral College Confirms Biden Presidency

As the Electoral College confirmed President-elect Joe Biden’s win in the 2020 election on Monday, Attorney General William Barr said he planned to resign later this month.

  • Earlier in December, Attorney General Barr said the Justice Department had found no evidence of widespread voter fraud, contradicting the Trump campaign’s allegations, without evidence, of rampant fraud that altered the outcome of the election.
  • In his resignation letter, Barr thanks the president, saying that it is “incumbent on all levels of government, and all agencies within their purview, to do all we can to assure the integrity of elections and promote public confidence in their outcome.”
  • Following several failed attempts by the Trump campaign’s legal team, and 17 Republican attorneys general, to challenge the election results in court, electors from states including Nevada, Georgia, Pennsylvania, Arizona, Michigan and Wisconsin confirmed Biden’s win, 306 electoral votes to Trump’s 232.
  • “In this battle for the soul of America, democracy prevailed,” Biden said in a speech Monday night. “We the people voted. Faith in our institutions held. The integrity of our elections remains intact. And, now it is time to turn the page, as we’ve done throughout our history. To unite. To heal.”
  • Russian President congratulated President-elect Biden for the first time since the election after the Electoral College confirmed the result.

What’s Next: The official tallying of electoral votes will take place on Jan. 6, which will be presided over by Vice President Mike Pence. Trump would require unprecedented intervention from Congress—including in the Democratic-controlled House of Representatives—to overturn the results.

—Connor Smith


U.S. Begins Vaccine Rollout

A nurse in Queens, N.Y., was the first American to receive a vaccine Monday as states across the country began administering the vaccine developed by Pfizer and BioNTech.

  • The effort to roll out vaccines will be the largest immunization effort in the U.S. since the successful administration of millions of polio vaccine doses in the 1950s.
  • Initial doses of the vaccine are reserved for health care workers and nursing home residents. Pfizer has a deal to provide 100 million doses to the U.S. government and is in talks to provide another 100 million doses—enough to vaccinate about a third of the U.S. population.
  • More Americans could be vaccinated sooner if, as expected, Moderna’s vaccine is approved for emergency use by the Food and Drug Administration later this week. Twenty million doses of that vaccine will be available in the U.S. in December.
  • The U.K.’s vaccination effort, which began a few days before emergency authorization was granted in the U.S., is being slowed by a requirement that doctors monitor patients for 15 minutes after they receive their shot following two reports of extreme reactions.

What’s Next: Most Americans will have to wait until the spring to get inoculated, “likely by the end of March, beginning of April,” the nation’s top infectious disease expert, Dr. Anthony Fauci, said.

—Ben Walsh


Bipartisan Stimulus Proposal Released, But Deal Still Looks Far Off

Negotiations over another round of coronavirus stimulus ground on in Washington, D.C., but Democrats and Republicans are no nearer to a deal than they have been after months of stalemate.

  • A bipartisan group of senators released the legislative text of their $908 billion package on Monday afternoon. The two-part bill severs the more divisive $160 billion in funding for state and local governments and temporary liability protections from less controversial provisions, such as federal unemployment aid and support for small businesses.
  • Senate Majority Leader Mitch McConnell said Monday that Congress needed to pass a coronavirus relief measure but did not directly address whether he supported the compromise being crafted by the bipartisan group of senators.
  • House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin held talks over the phone Monday, but did not announce any concrete progress.
  • Sen. Bernie Sanders told Politico he would vote against the bill. Citing the fact that Democrats have repeatedly agreed to smaller and smaller packages without similar concessions from Republicans, Sanders said, “That is not a negotiation. That is a collapse.”

What’s Next: Lawmakers got closer to a deal on government spending bills that would avert a shutdown, with legislation set to be filed as early as Tuesday. Both Pelosi and McConnell have said that attaching stimulus measures to the funding bills represents the best chance to pass coronavirus relief.

Ben Walsh


FTC Investigates Big Tech as Apple Rolls Out New Privacy Labels in App Store

The Federal Trade Commission is launching a privacy investigation of top technology platforms into how they use and collect people’s personal data. The move comes as regulators and politicians are taking an increasingly combative posture toward Big Tech, including last week’s antitrust suit against Facebook.

  • The agency is looking into how Amazon, Facebook, WhatsApp and others determine which ads and content are shown to users, as well as how their data collection practices affect teens and younger kids.
  • The companies subject to the requests are not accused of any wrongdoing, but the FTC has the authority to conduct studies of companies that it regulates without a specific law enforcement purpose, Axios noted.
  • “Despite their central role in our daily lives, the decisions that prominent online platforms make regarding consumers and consumer data remain shrouded in secrecy,” the FTC said in a statement. “Critical questions about business models, algorithms, and data collection and use have gone unanswered.”
  • On Monday, Apple began rolling out new privacy labels showing how apps on its platform use customer information. Labels include words like “data used to track you” and “data linked to you.” They also specify which type of data is collected, such as location.

What’s Next: The App Store’s new labels are yet another flashpoint in the conflict between some app developers and Apple. WhatsApp has complained that the labels don’t let app makers explain the various ways they protect consumer privacy.

—Ben Walsh


London in Tight Lockdown as British Economy Shows Pandemic Scars

The U.K. capital will move to the country’s tightest restriction regime Wednesday after a few weeks showing coronavirus infections rising at an alarming pace, which will add another hit to an economy struggling with the pandemic’s consequences.

  • Health Secretary Matt Hancock told Parliament on Tuesday that the “sharp, exponential rise” of infections in the greater London area as well as nearby Kent and Essex necessitated to put the regions under the toughest, tier 3 regime from early Wednesday.
  • Hancock told the House of Commons that a new strain of the virus could be associated with the fast spread in the southeast of the country, but that nothing suggests for now it is resistant to vaccines or causes more serious diseases.
  • The Office for National Statistics said Tuesday that the unemployment rate rose to 4.9% in the three months ended in October, as the number of redundancies rose to a record 370,000 in the same period.
  • The pound was down 0.3% against the euro in morning trading, in spite of the flicker of hope generated by the continuation of talks on a future trade deal between Britain and the EU. The British currency has fallen by more than 8% against the euro in the last year.

What’s Next: The U.K., which last week became the first country to start a mass Covid vaccination campaign, is an illustration of the struggles of most governments as they try to balance hopes for controlling the virus in the future with tough restrictions in the short term.

Pierre Briançon


Why December's Small-Cap Rally Might Not Last

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