Smaller Fed Cut May Bring Small Cap Reversion, RBC’s Calvasina Says

Bloomberg Television
16 Sept 202402:18

Summary

TLDRIn the discussion, Jon and Laurie delve into the vulnerability of small-cap stocks in the wake of potential Federal Reserve interest rate cuts. With the market anticipating a 50 basis point cut, small caps surged, but Laurie warns that if the Fed only delivers a 25 basis point cut, there could be a reversion. She notes that small caps are currently fully valued and positioned, contrasting with their under-owned and cheap status a few months prior. Laurie emphasizes the need for a strong economy with above-average GDP growth, suggesting that a soft landing with only 1.5% to 2% GDP growth won't suffice for small caps; they need a more robust 2.5% to 3% or better.

Takeaways

  • 🏦 The discussion revolves around the potential impact of a 25 basis point interest rate cut by the Federal Reserve on small cap stocks.
  • 📈 Small cap stocks surged on optimism about a 50 basis point cut, but there's concern about their vulnerability if only a 25 basis point cut occurs.
  • 📊 Current valuations for small caps are considered full, and market positioning is also full, unlike a few months ago when they were undervalued and underowned.
  • 📉 There's a worry that if the Fed cuts by only 25 basis points, there could be a reversion in small cap stocks, as they were propelled by fast money crowd and passive flows, which can be fickle.
  • 💼 The economic data and the state of the economy play a crucial role in the performance of small caps, with the need for a delicate balance between growth and stability.
  • 📉 Small caps typically perform well during cutting cycles, but a recession could change the investment strategy to selling into the recession and buying on the way out.
  • 🚀 For sustained outperformance, small caps need an economy that's not just growing, but growing above average, with GDP growth of 2.5% to 3% or better.
  • 🔍 The conversation highlights the importance of economic indicators and how they can influence investor sentiment and market behavior, especially for small cap stocks.
  • 💭 There's a nuanced view on the Fed's actions and the economic backdrop, suggesting that the market's reaction to Fed decisions is complex and multifaceted.
  • 🌐 The discussion implies that global economic conditions and the Fed's policy decisions are closely watched by investors, especially in the context of small cap stocks.

Q & A

  • What is the significance of the number 25 mentioned in the transcript?

    -The number 25 refers to a 25 basis point interest rate cut by the Federal Reserve, which is a topic of discussion regarding its impact on the market, particularly small cap stocks.

  • Why did small cap stocks surge on Friday as mentioned in the conversation?

    -The surge in small cap stocks was attributed to renewed optimism about a 50 basis point cut by the Federal Reserve, which was anticipated to be positive for these stocks.

  • What does the term 'valuations are full' imply in the context of small cap stocks?

    -When the speaker says 'valuations are full,' they mean that the current price of small cap stocks reflects all known information and may not be undervalued or under-owned as they were a few months ago.

  • What is the concern expressed about small cap stocks if the Fed only cuts by 25 basis points?

    -The concern is that if the Fed cuts by only 25 basis points instead of the 50 that propelled small caps higher, there could be a reversion or a drop in the performance of small cap stocks.

  • Who is driving the recent trade in small cap stocks according to the discussion?

    -The recent trade in small cap stocks is being driven by the 'fast money crowd,' indicating that the investments are more speculative and potentially short-term in nature.

  • How does the type of economic growth impact small cap stocks according to the transcript?

    -Small cap stocks need a strong economy with above-average GDP growth to perform well. A soft landing with low GDP growth may not be sufficient for small caps to continue their outperformance.

  • What historical pattern is mentioned regarding small cap performance during a cutting cycle?

    -In past cutting cycles, small caps have done very well and started a longer-term outperformance cycle. However, if a recession occurs, the strategy shifts to selling before and buying after the recession.

  • What is meant by 'threading the needle' in the context of small cap stocks?

    -The phrase 'threading the needle' refers to the delicate balance required for small cap stocks to continue performing well. It means avoiding a recession while still achieving strong economic growth.

  • What percentage of GDP growth is suggested as necessary for small cap stocks to thrive?

    -For small cap stocks to really thrive, the GDP growth needs to be around 2.5% to 3% or better, as mentioned in the transcript.

  • What is the implication of passive money flows into small cap stocks as discussed?

    -Passive money flows into small cap stocks are described as 'very, very fickle,' suggesting that they can be unstable and may lead to sudden shifts in the market.

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Related Tags
Small CapsFed CutsMarket OutlookInvestment StrategyEconomic DataStock MarketGrowth RatesInvestor InsightsFinancial AnalysisEconomic Trends