Stocks Struggled Yesterday, But Italy's Woes Overblown

Tough start to the week with all of the major indexes closing in the red. But I should note that the Russell 2000 Small-Cap Index barely budged, giving up just 0.20% by day's end.

The outperformance of the small-cap index is significant because it's usually considered a barometer of the market's appetite for risk and what can be expected to come in the broader market. To me, this shows last week's upside breakout to new highs in the Russell 2000 Index was smartly done and foreshadows more gains to come for stocks.

Newswires kept pinning the drop on Italy and their inability to form a new government coalition as the cause. But given that Italy's economy is only the size of the fifth biggest state in the US, the -1.50% drop in the Dow is probably overdone. In other words, I don't see this as having any long-term impact on the market.

Granted, some analysts were less concerned with what happens to Italy and more concerned with what it could mean for the broader EU. Although, that's a long stretch to make at this stage. But if one wants to make it, I should point to the rally the markets made after the UK's Brexit vote.

Either way, I do not see this latest 'crisis' as having any legs for the markets.

In other news, the S&P Corelogic Case-Shiller Home Price Index was up 1.0% m/m vs. last month's 0.7% and views for 0.5%. On a y/y basis, it was up 6.8% vs. expectations for 6.4%.

The Dallas Fed Manufacturing Survey showed the Production Index came in at 35.2 vs. last month's 25.3, while the General Activity Index rose to 26.8 from 21.8. Analysts noted that production was at a 12-year high while growth in new orders also hit a 12-year high.

Consumer Confidence jumped to 128.0 from last month's 125.6. Confidence levels remain near historic highs.

The State Street Investor Confidence Index pulled back some, but is still above the 100 threshold at 103.5, showing institutional investors are still net buyers and accumulating equities. The North American component came in at 104.3, Asia at 103.2, and Europe at 101.5. Each were down from last month, but the buying from professionals continues and remains a bullish sign.

Given all of the above, I would continue to be a buyer on dips and a buyer on rallies as I'm expecting the broader markets to challenge their all-time highs in the near offing.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research

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