Small Stocks Outperform Thanks to Confidence That Interest Rates Are Going Lower
The big-cap names saw some "sell the news" action, but traders rotated into more speculative names.
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The August Employment Report was much weaker than expected, with just 22,000 new jobs created versus expectations of around 75,000. The unemployment rate ticked up to 4.3%.
The market has been anticipating a weak report and has already priced in a 100% chance of a quarter-point Fed rate cut at its next meeting on September 17. The weak numbers resulted in some hope for a half-point cut, and it also increased the odds of cuts in October and December.
The market has been climbing steadily higher on the belief that the Fed has made a dovish pivot, and the weak jobs report is confirmation that the rate cuts are coming.
This poor jobs news was not at all unexpected, and with the indices trading at all-time highs, it is a perfect "sell the news" setup. After a little early strength, the S&P 500 and DJIA reversed lower. There was a little late bounce, but the S&P 500 finished with a loss of 0.3%.
The good news is that the Russell 2000 ETF IWM outperformed with a gain of 0.5% and the long-suffering biotechnology group looked like the Magnificent Seven MAGS with a gain of nearly 2%. The Mag Seven group lost 0.2%. Due to the small-cap strength, breadth was slightly positive, and there were around 300 names hitting new 12-month highs.
The conventional wisdom is that smaller stocks are more sensitive to interest rates because they tend to carry high levels of debt. Names like Apple AAPL are sitting on a large amount of cash, so lower rates actually hurt them a bit. The biotechnology names are always in need of capital, and they benefit when they can obtain it at lower rates.
Investors have been focused primarily on the employment issue since Fed Chair Jerome Powell’s comments at Jackson Hole, but next week we will have the CPI and PPI reports, so inflation will be a topic once again. There is talk that many companies have depleted the inventory buildup that they took in anticipation of tariffs, so there could be some price pressures, but it is very unlikely that inflation is going to be hot enough to offset the Fed’s dovish pivot.
I continue to like the stock picking and the trading in secondary stocks. The bears are focused on the indices and negative seasonality, but whether this is a good environment or a negative one depends greatly on which stocks you are looking at.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
