Eq: Small Caps

(Chicago)

Small cap stocks are starting to have their day in the sun. The Russell 200 has started to catch up to large cap indexes this autumn, and some stocks look ready to surge. The index is now up 21.2% for the year, just a few points behind the S&P 500’s 25.5%. According to Merrill Lynch, economic recoveries “tend to be the best phase for small-caps …That’s one key reason we think we could be poised for a shift from large to small”. According to a Jefferies analyst, “I think small is primed to outperform as the economy and earnings improve in 2020 … That’s going to be the whole ballgame”.


FINSUM: It is hard to imagine the US is going to enter an “economic recovery phase” at the end of a ten-year bull run, but the market’s perception of the current economy is exactly that, so these forecasts might be spot on.

(New York)

Any small cap investor can tell you that the end of the year is not usually a good time. Small caps historically suffer in November and December compared to the rest of the year. However, 2019 looks to be shaping up differently according to the Wall Street Journal. The reason small caps are usually weak at the end of the year is that managers sell off their holdings and mirror the market at the year-end as a way of insulating their annual bonus (which is based on outperformance). However, in years where overall stock performance has been strong, this pattern is less obvious. So, given 2019’s strong gains, it seems like small caps probably won’t suffer so much.


FINSUM: This is by no means a guarantee, but it certainly seems like a more positive structural consideration.

(New York)

A lot of demographers think there is going to be a coming baby boom, as Millennials finally have children. There is some disagreement over this as many think the boom is already a bust, but the reality is that there is likely to be a lot of babies born the next few years as Millennials make a last push to have children. The parents are likely to be older, which means more disposable income, and more spending. Therefore, buying into baby-oriented stocks seems like a good idea. Take a look at Carter’s, Bed Bath & Beyond (which has a baby unit), and Children’s Place.


FINSUM: We think there will be a baby rush over the next five years as Millennials try to have kids before aging out. That presents an opportunity for the baby sector.

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