- While the macroeconomic backdrop is generally positive, there are some concerning signs.
- The IWC has underperformed across a number of time frames relative to its peers.
- The chart shows that the IWC is still consolidating gains.
My methodology for looking at an ETF that tracks a broader index is to first look at the macroeconomic environment. The purpose of this is to see if the current time is an appropriate time to buy or sell an index. In the second part of the article, I look at how the index-tracking ETF has performed relative to its peers following by an analysis of the ETF's chart.
Investment thesis: the iShares Micro-Cap ETF (NYSEARCA:IWC) is an underperformer relative to its peers. The chart shows that it is still consolidating gains from the rally that lasted from the spring of 2020 to the spring of 2021. In addition, there are some modest concerns about price pressures and the new virus variant that could slow growth. Hold off for now.
To look at the macroeconomic backdrop, I will use testimony from Chairman Powell and the latest Beige Book to provide a general outline of the US economy. I will then supplant that data with charts from the St. Louis Fed's FRED system; these charts are outlined in blue and have the word FRED in the upper left-hand corner.
Chairman Powell offered the following description of the US economy in Congressional testimony from earlier this week (emphasis added):
The economy has continued to strengthen. The rise in Delta variant cases temporarily slowed progress this past summer, restraining previously rapid growth in household and business spending, intensifying supply chain disruptions, and, in some cases, keeping people from returning to work or looking for a job. Fiscal and monetary policy and the healthy financial positions of households and businesses continue to support aggregate demand. Recent data suggest that the post-September decline in cases corresponded to a pickup in economic growth. Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years.
The size of the economy is now larger than before the recession:
Total real GDP bottomed right at the end of the recession. It has since rebounded and is now above pre-recession levels.
Regarding consumer activity, consider this chart:
Personal consumer expenditures, like GDP, bottomed at the end of the last recession. They have continued to rise since.
The above chart from Zacks shows that revenue and earnings for the S&P 500 grew strongly in the 3Q21.
The above chart (also from Zacks) shows that 4Q21 earnings projections are still strong.
The above data show there is ample demand and overall activity to grow the economy.
Let's fill in some detail from the latest Beige Book (see link above; emphasis added).
Economic activity grew at a modest to moderate pace in most Federal Reserve Districts during October and early November. Several Districts noted that despite strong demand, growth was constrained by supply chain disruptions and labor shortages. Consumer spending increased modestly; low inventories held back sales of some items, notably light vehicles. Leisure and hospitality activity picked up in most Districts as the spread of the Delta variant ebbed in many areas. Construction activity generally increased but was held back by scarce materials and labor. Nonresidential real estate activity increased widely, while residential real estate activity grew in some Districts but declined in others. Manufacturing growth was solid across Districts, though materials and labor shortages limited expansion. High freight volumes continued to strain distribution systems. Energy activity was generally higher, growth in professional and business services varied widely, and demand for education and health services was largely unchanged. Loan demand increased in almost all Districts, though some reported declines in residential mortgages. Agriculture saw improved financial conditions overall and rising land values. The outlook for overall activity remained positive in most Districts, but some noted uncertainty about when supply chain and labor supply challenges would ease.
Most of the above commentary is positive. However, I've highlighted some negative points, most of which state that supply chain issues are holding back economic growth. They are leading to shortages in consumer goods, which have slowed consumer spending and manufactured goods. Both of which are dampening various aspects of demand.
This development is best shown in price data:
Above are charts of the Y/Y percentage change in the PCE and CPI price indexes, both overall and "core" (indexes excluding food and energy). All are at some of their highest levels in over 30 years. This shows how supply and demand are mismatched in the current environment. It also explains why there is a modest undercurrent of negativity amongst traders and investors.
Also adding to the uncertainty is the emergence of the new virus variant, which has increased the amount of uncertainty:
John C. Williams, President of the Federal Reserve Bank of New York, said the latest variant of the coronavirus could prolong the bottlenecks and shortages that have caused inflation to run hotter than expected, and is a risk Fed officials will assess as they "grapple" with how quickly to remove economic support.
So, while the economic backdrop is generally positive, there are just enough negative developments to check bullish sentiment.
|IWC's Relative Performance||6th||7th||7th||7th||4th|
Data from Finviz.com
The IWC has been a poor performer across most time frames:
IWC weekly chart from StockCharts.com
The above chart provides all the information we need to this analysis. Starting in the spring of 2020, the IWC rallied 193% before hitting a high last spring. Since then, the ETF has traded sideways, consolidating gains.
For now, don't add to a position or take a new one. The index continues to consolidate gains from the nearly 200% rally start started almost 2 years ago. In addition, there are sufficient economic issues (higher prices, supply chain issues, a new virus variant) to dampen activity.
This article was written by
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