Four small-cap specialists discuss inflation, active management, market contradiction and financial accommodation.
Chuck Royce: Reduced Inflation
I think investors have been over-focused about a recession coming and the headlines have confused people. What is happening is a slowdown in the rate of growth—the most normal thing in the world. We are not going into anything like recession. So, I think investors are overreacting to that. Second, inflation coming down or not going up dramatically is in general, a very positive thing. So, we’re having a very good combination really for stocks overall.
Francis Gannon: Active Management Poised Well Going Forward
I think one of the more positive things about the market these days that investors are missing, is that if you go back five years in time, you’re entering into the period of time when zero interest rate policy and quantitative easing was kind of hitting its max moment and active managers were underperforming. And that peak moment of underperformance is going to start rolling off over the next six months to twelve months and active managers are going to start looking much better in terms of their overall performance, something the market hasn’t thought about in a long period of time.
Jay Kaplan: Navigating Market Contradiction
There’s a lot of contradiction in the marketplace. The S&P 500 makes new all-time highs every day and the marketplace thinks there’s a “Fed Put” in case something goes wrong. So that’s one side. The other side is the Russell 2000 continues to underperform the S&P 500 while at the same time, the yield curve bounces around between flat and inverted and that typically signals a recession is coming soon. One of those is going to be wrong. We don’t know which one it is, but the positive surprise for us would be, and this is the camp that we’re in, that the recession isn’t coming soon and then the Russell ought to perform better when those worries go away.
Steve Lipper: Increased Financial Accommodation
So a positive investors are talking about is the perceived pivot by both the Federal Reserve (Fed) and the ECB to greater accommodation. However, there are two different components of that accommodation. One can be lower rates, but the one that doesn’t seem to be being talked about as much is increased financial accommodation, a resumption of quantitative easing inside or outside of the U.S.
And while we’re not macro analysts and we’re not predicting that, what we can say looking historically is that if it does occur, increased financial accommodation historically has been supportive of increases in small-cap stocks. We think that positive may not be appreciated.
Quantitative easing (QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.
The “Fed Put” is the widespread belief that the US Federal Reserve is willing and able to adjust monetary policy in a way that is bullish for the stock market.
The Russell 2000 Index is an unmanaged list of common stocks that is frequently used as a general performance measure of U.S. stocks of small and/or midsize companies.
The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.
Inverted yield curve refers to a market condition when yields for longer-maturity bonds have yields which are lower than shorter-maturity issues.
The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.