Courtesy of Pam Martens.
If there’s a bull market on Wall Street, somebody forgot to tell the small caps. The Russell 2000 index that measures the performance of smaller capitalized companies is down 3 percent this year versus the big capitalized companies in Standard and Poor’s 500 – which is up 8.9 percent year-to-date through the close yesterday.
This divergence is a worrisome sign for those who look at historical charts. It becomes even more problematic when combined with the recent news that a good chunk of the buoyancy in the S&P 500 is coming from these big corporations spending billions to buy back their own stock – sometimes in unregulated dark pools operated by global banks on Wall Street.
Clearly, smaller companies can’t borrow tens of billions in the debt markets in order to plow it into their own share repurchase programs. As we reported in July, in 2013 corporations authorized $754.8 billion in stock buybacks while simultaneously borrowing $782.5 billion from credit markets. According to Jeffrey Kleintop, Chief Market Strategist for LPL Financial, big corporations are now the single largest buying source for all U.S. stocks.
Last week, the Wall Street Journal cited data from Birinyi Associates showing that U.S. companies have continued the buyback trend this year, repurchasing their own shares to the tune of $338.3 billion in the first six months of this year — “the most for any six-month period since 2007,” the year before the biggest crash since the Great Depression.
If big company money is underpinning the upward trajectory of the S&P 500 while the broad market in thousands of other companies’ share prices fail to confirm this bullish sentiment, it’s tough to make the case for a robust, sustainable bull market.
Russell 2000 Versus S&P 500 Past 12 Months (www.BigCharts.com)
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