This Small-Cap Story Is Compelling
It’s a chronicle of a rally foretold.
It was the first trading day of the new year, and the StockPick Interview featured Erin Gibbs, the chief investment officer of Main Street Asset Management.The Russell 2000 $RUT had just finished a November-December run where it posted a 21.9 percent gain, which ranked fourth among the small-cap index’s 10 best-ever two-month rallies.
Investors, traders, and speculators were pricing in a Federal Reserve rate cut, and data from the other nine similar rallies suggested double-digit gains one, three, six, and 12 months out.
“I think there are a lot of things going for small-caps, even as there's certainly been an appreciation built in as we expect the Fed to cut rates in 2024,” Gibbs said in January.
“Whether that happens in the first half or the second half might disappoint some investors.”
You really can’t get much better when it comes to calling a trade, getting both direction and broad timing basically right.
And, with the market now pricing in 100 percent probability the world’s most important central bank will trim the federal funds target range by 25 basis points in September, small-caps are ripping.
The RUT last closed lower on July 9, the first day of Fed Chair Jerome Powell’s semi-annual testimony to the US Congress, when he said employment now as well as inflation had his and his colleagues’ attention.
Since then it’s been five straight days of 1-, 2-, and 3-percent-plus gains, the RUT rising 11.38 percent altogether.
Gibbs identified a couple of key points back in January that remain relevant today.
First, small-caps typically trade at a higher valuation than large-caps, a premium of about 15 percent to 20 percent.
For two and a half years, small-caps actually traded at a discount that steepened as the Fed raised rates. In January, that discount was about 30 percent.
The mispricing range was on the order of 50 percent. “And that's big, that's extreme,” Gibbs noted.
Small-caps had “a lot of room for valuation expansion.”
Gibbs noted that her call was based on a one-year outlook. “I think you need to be able to play out any changes and expectations around the Fed.”
That’s pretty good stuff.
Semiconductor component manufacturer ASML Holdings $ASML, health care conglomerate Johnson & Johnson $JNJ, and U.S. Bancorp $USB, the fifth-largest commercial bank in the US, will get the day started before the opening bell.
Midstream energy giant Kinder Morgan $KMI, scrap-based minimill operator Steel Dynamics $STLD, and United Airlines $UAL, the No. 4 North American air carrier, will report after the closing bell.
Resort operator Las Vegas Sands $LVS, freight carrier P.A.M. Transportation Services $PTSI, and Alcoa $AA, the world’s largest bauxite miner and alumina refiner, will also post financial and operating results.
All the other indexes are doing well, too, with the Dow Jones Industrial Average rising more than 700 points for its best single-day performance in 13 months and the S&P 500 also hitting another new record high.
It was a ho-hum day for the Nasdaq Composite, as breadth continues to expand beyond not just the big names but all tech and into more sectors and industries.
That bodes really well for this rally.
And how about a shout-out to Erin Gibbs…
