Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Small Caps Are Leading While Big Tech Sits Out
Transcript
- Lucas: The Russell 2000 just wrapped up its best five-day stretch in months — up 6.2 percent since last Tuesday. Meanwhile the S&P 500 is up just over 2 percent, and the NASDAQ about 2.7. So the clear story right now is small caps are running, and large-cap tech is basically sitting this move out. Luna: That's a big spread. I mean, the Russell has been the outperformer for a few weeks now, but 6 percent in five days feels like something shifted. What's actually driving it? Lucas: I think there are two forces at work. One is the yield curve — or rather, the part of it that's still inverted. The three-month Treasury is yielding 3.68 percent, and the ten-year is at 4.57. That's a spread of about 89 basis points, inverted. That's actually widened a little in the last week. Luna: Wait — an inverted yield curve usually signals recession fear, which should hurt small caps more than big tech. But we're seeing the opposite. Lucas: Exactly. And that's the second force. The inversion is happening at the short end, but the two-year to ten-year spread is actually positive — 43 basis points. So the market is pricing in near-term uncertainty but longer-term growth. Small caps tend to be more cyclical, more domestic, and more sensitive to the real economy. If traders think the economy is going to muddle through without a recession, smaller companies benefit disproportionately. Luna: And big tech — those mega-cap names — they've been priced for perfection for years. Maybe investors are finally rotating into value and cyclicals? Lucas: I think that's exactly what's happening. Look at the VIX — it's at 16.98, down about 2.6 percent over the same five days. That's not panic. That's complacency. And the VIX of the VIX, the V-V-I-X, dropped 5.6 percent. Options traders aren't even hedging for a volatility spike. So the move into small caps feels like a genuine risk-on rotation, not a defensive shift. Luna: Who's doing the buying though? Is this retail piling in after the Russell made new highs, or is there institutional weight behind it? Lucas: From the volume data I'm seeing, it's both. But the institutional flow is notable because a lot of active managers have been underweight small caps for years. If they start to rebalance, that's a multi-month tailwind. The Russell is still trading at a discount to the S&P on a price to earnings basis — roughly 16 times forward earnings vs 21 for the large-cap index. So there's room to run. Luna: So you think this rally has legs? Or is it just a catch-up trade that fades in June? Lucas: I'd watch the three-month yield — if it keeps rising, that inversion deepens, and that historically has been a real recession signal. But right now, the GDP data is solid. Real GDP growth annualized at 2 percent in Q1 2026, up from 0.5 percent the quarter before. That's a meaningful acceleration. If the economy keeps growing at that pace, small-cap earnings could surprise to the upside. Luna: And what about the sectors within the Russell? Is it broad-based or concentrated in, say, financials and energy? Lucas: It's pretty broad. Financials are leading, which makes sense with a steeper yield curve, but industrials, materials, and even some beaten-down small-cap tech are participating. The one laggard is healthcare — small-cap biotech has been under pressure. But overall, it's a genuine broadening of market leadership. Luna: You know, this reminds me of a conversation we had a few weeks ago about how the Russell rally had room to run. At the time, I was skeptical. Now, with the data in hand, I'm starting to come around. Lucas: It's always easier to believe the trend after you've seen the numbers. But the key is whether this rotation can survive a Fed meeting or a surprise in inflation data. The next CPI print is in two weeks, and that could rattle the small-cap trade if it comes in hot. Luna: Right — because small caps are more sensitive to interest rates. They carry more debt, and their financing costs go up faster when rates stay high. Lucas: That's the risk. But for now, the market is saying 'growth is back, and I want exposure to the real economy.' And if that narrative holds, small caps could keep outperforming for the rest of the quarter. Luna: You know, Lucas, it's conversations like this that make me glad we do this show ad-free. We can just dig into the data without interrupting to sell someone a mattress or a meal kit. Lucas: Yeah, that's the whole point. We wanted to create something that's useful and straightforward. And if you find value in that, you can support the show at buy me a coffee dot com slash fexingo. That's it — no tiers, no perks, just knowing the show stays independent. Luna: Exactly. It's a small gesture that means a lot. So thanks to anyone who's already chipped in — it helps us keep the focus on the markets, not on ad reads. Lucas: Alright, back to the rotation. I want to talk about one more data point that I think reinforces the small-cap thesis. The Dow is also up 2.1 percent over the last five days, hitting 50,422. That's a record close. The Dow is heavily industrial and financial. So the same rotation is happening at the blue-chip level. Luna: That's a good point. The Dow making new highs while the NASDAQ lags is another sign that the baton is passing from tech to value. Lucas: And if you look at the NYSE composite, it's up 2.3 percent. That's a broad measure of all stocks listed on the New York Stock Exchange, so it confirms breadth. The rally isn't narrow. Luna: So for an investor listening right now, what's the actionable takeaway? Should they be piling into an IWM or a small-cap ETF? Lucas: I'd be careful about chasing a 6 percent move in five days. But if you're underweight small caps relative to your long-term target, this might be a moment to rebalance. Just don't expect the next five days to repeat that gain. The easy money in this leg might already be made. Luna: So patience, but positioning. I like that. We'll be watching the yield curve and the next CPI print closely. Lucas: Absolutely. For now, the bull case for small caps is intact, but it's not a slam dunk. As always, the data will tell us if this is a new trend or a head fake. Luna: And that's what we're here for — to help make sense of it. Thanks for listening.