In the turbulent days when the Federal Reserve cut interest rates, small-cap stocks showed strong resilience and became a bright spot in the market.
Stock markets had mixed reactions to the Federal Reserve's massive 50 basis point rate cut on Wednesday. But when the dust settled, two big winners emerged.
Small- and mid-cap stocks managed to hold on to gains on Wednesday, while large-cap stocks fell, according to FactSet data.
It's not surprising that these two market sectors have outperformed other stocks. Before the Fed's decision, market strategists including Morgan Stanley (MS.N) and UBS (UBS.N) had emphasized in reports that small- and mid-cap stocks typically achieve excess returns when interest rates fall.
However, despite the small gains, these performances still represent significant confidence in the U.S. economy and the Fed's ability to manage it. "If you're feeling a little cautious about the outlook for small-cap and mid-cap stocks because of the economy, then you might feel like this is a concern you have," James St. Aubin, chief investment officer at Ocean Park Asset Management, said in an interview. barriers have been removed.”
Now, investors are eager to see whether their latest gains can last. Much will depend on whether the Federal Reserve can successfully pull off the soft landing many stock bulls are hoping for, St. Aubin said.
Of course, St. Aubin points out that believers in the small-cap resurgence have reason to be cautious because they have suffered losses before. A rebound in small- and mid-cap stocks late last year quickly fizzled out. Although they have recovered somewhat in the past few months, as of Wednesday, they were still below their July highs.
Ultimately, investors will be waiting for clear signals from economic data to see if this trend can continue.
Based on Wednesday’s market reaction, investors appear to agree with Federal Reserve Chairman Jerome Powell that the central bank is not behind the curve, said Callie Cox, chief market strategist at Ritholtz Wealth Management.
While U.S. stocks fell, yields on long-term Treasurys and bonds rose, reversing what some described as bets on a recession.
Yet a 50 basis point cut in Fed rates alone may not be enough to prevent a recession or further labor market weakness. As investors have recently demonstrated, changes in economic sentiment can quickly translate into turmoil in financial markets.
The Fed plans to slow the pace of rate cuts going forward, according to updated projections released recently by the central bank — though Powell said it could move faster if circumstances change.
“The data currently supports that, but the job market could deteriorate quickly,” Cox said.
Regardless of how the economy develops in the future, this could have profound implications for the stock market - and small- and mid-cap stocks may be the most vulnerable.
Article forwarded from: Jinshi Data
