Small Cap's Moving, Rate Hike Sooner

Macro Perspective: Tue 9 Nov 21

Last week, the Fed Chair told us that "maximum employment" was the condition for a liftoff in rates.

Here’s what's happened since? 

• Two days later we had a booming jobs report, with an unemployment rate that dropped to 4.6%, on 5% wage growth. 

• Another effective oral covid treatment option was introduced. 

• Biden's vaccine mandate for businesses was blocked by a federal court. 

• The House passed the $1.2 trillion infrastructure bill. 

• Yesterday the U.S. lifted its foreign travel ban. 

This is a cocktail for employment ("maximum employment"), which adds to the inflation pressures, which should speed up interest rate liftoff.  

With that, the Fed ran out a slew of speakers (a total of six) to ensure that they maintain a grip on consumer psychology. As we've discussed, the Fed is far more concerned about inflation expectations, than they are about inflation - what they say and what they do (actions) are often very different.

For us, having the benefit of on-the-ground/everyday observation, it's fair to expect higher rates will come sooner than they would like us to believe.

On that note, we've been talking about the opportunity in small cap and value stocks, which tend to outperform in rising interest rate environments. The move is now underway…

We looked at this chart last Tuesday, as it was closing in on the highs of the year (of March) - we now have a breakout which should extend.

The S&P 500 is now eighteen percentage points higher than its March highs (formerly, record highs) - this outperformance comes as small caps should be outperforming large caps coming out of recession - the performance gap may close quickly (i.e. much higher small caps into the end of the year).