Need to Know: There‘s a hidden bet on biotech in this closely watched index

For a second, let’s look beyond whether the leader of the free world spun a tale of quite literally Chinese whispers.

One reason the S&P 500  has had such stellar growth since 2006—better, it should be said, than pretty much every developed world index—is the hidden bet made on the big internet and tech plays, which is responsible for about half the outperformance of other large-cap indexes.

The Russell 2000 , the closely followed small-cap index, is in effect making a similar bet on biotech, according to analysis from strategists Tavis McCourt and Leslie Vandegrift at Raymond James in the call of the day.

Pharmaceuticals and biotech currently represent 9.4% of the Russell 2000, and 15.5% of the Russell 2000 Growth index   weightings, the brokerage found. “In this light, given the large exposure that the Russell 2000 and Russell 2000 Growth now have to biotech, it is very likely that the next 10-20 year performance of these indexes vs. other indexes in the U.S. and outside the U.S. will be significantly driven by the performance of small-cap biotech,” the broker said.

That can make for a bit of a roller coaster—a biotech index put together by Raymond James has over twice the volatility of the Russell 2000 and the S&P 500. Some of the weak performers fall out of the index when rebalancing occurs, while the better performers grow out of the index into the S&P 500. Still, while the big boys of the health-care sector have been pouring money into stock buybacks, they still have plenty of cash available for buying out these small-cap minnows.

One way to take advantage of this shift into biotechs is to buy the ones expected to be added to the Russell 2000—the average annual return of buying new entrants in the six months before inclusion is 53%, the strategists say.

The market

U.S. stock futures  were a touch higher, following Monday’s 269-point burst for the Dow industrials, triggered by President Donald Trump’s claim of calls from China to restart trade talks.

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The yield on the 2-year Treasury  was once again higher than the 10-year , after being inverted at the close for the first time since 2007.

The dollar  fell vs. the yen.

The buzz

Johnson & Johnson   may get a lift after a judge ruled it had to that it fueled Oklahoma’s opioid crisis—which is less than some analysts feared. Luxury online retailer Farfetch  said it wasn’t going to buy Barneys, the department store, after a report said it was in advanced talks to do so. J.M. Smucker  declined after the company lowered its full-year guidance.

China is still of the calls Trump says the country made. The Wall Street Journal reports that Carlos Ghosn, the former Nissan Motor CEO arrested in Japan, .

Data on house prices and consumer confidence is on tap.

Chart of the day

Surely, negative interest rates would lead to higher inflation expectations, right? Not so finds a that examined Japan, which took its interest rates below zero in 2016. “Japan’s case is an extreme but potentially informative example illustrating the challenges associated with raising well-anchored inflation expectations through negative monetary policy rates,” the study found.

The tweet

A New York Times columnist and his provost—after being called a “bedbug” on a tweet.

Random reads

Former President Jimmy Carter, hip injury and all, .

Tomi Lahren’s yoga pants—which have room to pack a firearm—.

One photohas been likened to the Tiananmen era.

Always look on the bright side of life—it’s the key to longevity, .

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