Tuesday 24 September 2013

Chart of the Day - Correlation between Small-cap earnings growth and the US economy

"An explanation of cause is not a justification by reason." - C. S. Lewis 

Our Chart of the Day is the correlation between Small-caps earnings growth and the US economy given the Russell 2000 is at all-time high and comes from a note from Bank of America Merrill Lynch from the 24th of September entitled "No taper talk has given boost to small - nearing 1100 target":
"The Fed realizes that the US economy is not growing as fast as they have forecasted and if this remains the case,it would hurt small caps more so than large caps."
"No taper = slower US economy, bad for small.
The reason the Fed chose not to taper their QE program was the fact that the economic data of late has been weaker than expected. In fact based recent economic indicators the US economy is tracking at about 1.6% and below the BofAML’s forecast of 2.0% and a higher consensus number. Earnings estimates for the third and fourth quarter are based on a reacceleration of US growth and if this down not come to fruition, it will impact small more so than large. The correlation between US GDP, based on four quarter moving average, and smallcap earnings growth stands at 0.69, while it is lower for large caps (Chart 6)." - source Bank of America Merrill Lynch

So for the Russell to stay above the clouds, we better get US growth otherwise all bets are off...

"Shallow men believe in luck. Strong men believe in cause and effect." - Ralph Waldo Emerson 

Stay tuned!

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