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Chart of the Week: Small Cap Stocks and Credit Conditions Correlate

Author: Tim Sharp

Researcher: Jack Williams

Published: April 12, 2023

 

Small Caps have pulled back recently, with many investors taking note of the correlation to credit conditions, which have tightened a fair amount in recent weeks following the fallout of Silicone Valley Bank and Credit Suisse a few weeks back now.

Events such as the SVB fallout can cause banks to become more hesitant of lending to both individuals and businesses. This makes accessing credit, and at a decent rate, that much harder.

Rate expectations in the US have fallen in recent months and despite stubborn inflation, interest rates are now seeing cuts being priced in for as early as Q2 23’ from some analysts. The question is, what are the fed to do? Risk growth deteriorating and causing a potential recession or, cut rates and unlock growth where inflation could then spiral.

As pictured on the left, rate expectations are coming down, with analysts predicting multiple cuts through to Q1 2024. The chart shows the current rate expectations in blue compared to its expectations a month ago in dotted line.

Strangely enough, consumers seem to be holding up. Amidst high inflation, rising costs of credit, an uptick in mortgage rates and cost of living pressures, consumers have weathered the current environment better than feared. Many investors had their hat hung on a recession due to a weak US consumer but have yet to see it fully materialise. While certain items have seen demand reduce, many companies are holding the line in terms of margins and being able to pass additional costs onto consumers.

Labour markets remain extremely tight, traditionally supportive of consumer behaviour, this data paints a differing picture than other economic indicators such as PMI’s which have been weak in recent reading and remain in contractionary territory.

 

 

 

 

 

 

Charts – Bloomberg / Barclays Research

https://www.forbes.com/uk/advisor/personal-finance/2023/03/23/inflation-rate-update/

https://live.barcap.com/PRC/servlets/dv.search?contentType=PDF&docviewID=6435d2cabba1a914d01ac9ab

https://live.barcap.com/PRC/publication/FC_TEJ-IH4gfiB-IH4g_6435d2cabba1a914d01ac9ab

https://www.ft.com/content/cb0f2aba-dee4-4ddb-b00a-61c5f6759092

https://www.bloomberg.com/news/articles/2023-04-09/end-may-be-in-sight-for-global-rate-hike-cycle-as-fed-nears-peak

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