Are dollar shorts about to give small-cap stocks a shot in the arm?

From the Stansberry NewsWire team:

Today, we’re focusing on inflation and its impact on global asset classes. A key component of the current inflation debate is the impact on global currencies. One thing everyone agrees on is a pickup in global growth. Look no further than recent Chinese trade data and the European Central Bank’s (ECB) policy announcement. Coordinated global growth is continuing.

The best way for global central banks to combat a rapid rise in growth (aka inflation) is to raise interest rates. The Bank of Japan (BoJ)and the ECB are behind the Federal Reserve when it comes to actions that tighten policy. The ECB only this morning dropped language from its policy statement pledging to raise the size of quantitative easing (QE) if necessary. The BoJ recently said it would begin the debate on normalizing policy (aka tightening measures) in April 2019.

Global fund managers have been short the dollar and long in both the euro and the yen in anticipation of the BoJ and ECB tightening. There is no doubt that the U.S. is experiencing more growth… but on a relative basis, the other two must play catch-up. This is a typical “buy the rumor to sell the news” type of event. The smart money is getting ahead of the trade and will part ways when the herd tries to pile in.

This has turned into a boon for the S&P 500 Index. The index comprised of 500 large companies that represent all major market sectors. Many of these companies sell their goods and services overseas. In fact, overseas sales make up 46% of the S&P 500’s revenues. So one can deduce that as the dollar weakens, overseas sales should see a rise.

Conversely, the Russell 2000 Index is comprised of 2,000 small cap companies. They are primarily domestic-focused. So they don’t feel the positive sales impact of a weakening dollar, nor do they feel the negative impact of a rising dollar. They’re insulated to the dollar versus the S&P 500.

So the level of short interest in the dollar versus both the yen and euro is very crowded. At some point, this positioning must be unwound. And you don’t want to wait until a formal policy change announcement… You want to be ahead of the game.

Given the currency positioning, this could make a good case for owning small-cap stocks – think iShares Russell 2000 Fund (IWM) – versus owning large-cap stocks like the SPDR S&P 500 Fund (SPY), near term.

Download the Stansberry NewsWire podcast for Android and iOS.

And for daily alerts, trading tips, and actionable recommendations from the Stansberry NewsWire, click here.

× Subscribe to Crux
Want more posts like these?
Like us on Facebook?
Crux Contributors