But small-caps are waiting in the wings.
After rebounding in July to all-time highs, the S&P SmallCap 600 sold off in early August along with the rest of the market amidst fears that interest in artificial intelligence was waning. Small company stocks then spent August clawing back much—but certainly not all—of the losses, and still trail the S&P 500 and S&P 500 Equal Weight indexes year-to-date.
The biggest current headlines come courtesy of Federal Reserve Chair Jerome Powell who said the Fed is likely to lower interest rates in September—if inflation eases further in August.
At the Fed’s annual symposium in mid-August in Jackson Hole, Wyoming, Powell declared, “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
He added, “My confidence has grown that inflation is on a sustainable path back to 2%,” which is the Fed’s goal for the rate of inflation.
This clear signal of Fed action about rates helped drive the Dow 30 to an all-time high in the last week of August, with the S&P 500 teasing its prior highs but held back by an earnings slip by Magnificent 7 leader Nvidia.
Small-caps, which should have been buoyed by the clearest indication yet that interest rate reductions are on the horizon, failed to react meaningfully to Powell’s comments. In one of the mysteries of the stock market, the long-term outperformance of large-caps compared to small-caps therefore continues.
As Chuck Royce and his colleagues pointed out in Royce Funds’ commentary published on August 14, 2024, the outperformance cycles of large-to-small-caps often extends for more than a decade. “Going back nearly a century to 12/31/31 through 6/30/24,” they wrote, “we see eight market capitalization-based outperformance cycles, with the most recent period, which began in 2014, still in effect. The four small-cap cycles lasted longer on average, running 14, 11, 10, and 15 years, while large-cap cycles lasted 12, 5, and 16 years, with the current cycle running for just over 10.”
Looking back at a decade of large-cap outperformance is perhaps not a pleasant musing for small-cap investors. The possibility that it could extend for another six years as it did in the 1980s and ‘90s is perhaps even bleaker, however.
A good antidote to this historical narrative is to remember that well-managed companies of any size, when purchased at reasonable prices, perform well in any market climate.
In this issue of the SmallCap Informer, we are ready to act on our conviction that economic pressures—including questions about how fast and how much interest rates would be increased—could finally be put to bed and allow many economically-sensitive companies to move into their next stages of growth. Specifically, companies related to home construction, building materials, and recreational vehicles that have long been undervalued may now be seeing the first glimmers of light at the end of a long tunnel.
Our pick this month is a company in the Consumer Cyclical sector that has perhaps the strongest prospects of its industry group throughout down stages of economic cycles, but stands to pick up steam as interest rates and thus mortgage rates ease.
Stay the course!
Subscribers can read Doug's complete commentary and the in-depth profile of our recommended small company stock in the September 2024 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 44 high-quality small company stocks currently covered in the newsletter.