EB Daily Market Report - Friday, August 23, 2024

I wanted to reach out to everyone this morning, because I've decided to make a strategy change based on Fed Chief Powell's remarks from the Jackson Hole, WY Economic Symposium. Powell made it very clear today that the Fed's policy will change. His exact quote was, "the time has come for policy to adjust." (as if it weren't already time).

I know I've talked about the risk of holding stocks in August/September and that won't go away. But now the risk of sitting on the sidelines when a small cap explosion could unfold has grown considerably too. We saw the CRAZY market rotation into small caps on July 12th, the morning that the June CPI was released, putting nails in the inflation coffin. Over a two-week period, the IWM outperformed the QQQ by 18 percentage points!!! There is no doubt that Wall Street believes lower interest rates will benefit small and mid caps in a much bigger way than the large caps and I agree.

I'm not going to say we don't have risks ahead. We absolutely do. We could see economic deterioration before any future interest rate cuts begin to impact the economy. The Presidential Election cycle hasn't gone anywhere. We still have that ahead. But I am completely on board with a VERY LARGE small cap rally - even if we see short-term weakness ahead. The risks have changed and that's why I'm changing.

Check out today's performance among our key index ETFs since Jackson Hole Jay began his speech:

Listen, this is only one hour of trading after the Powell speech, so things could change. Perhaps it's nothing more than a knee-jerk reaction. However, I know the importance of lowering the fed funds rate. This is a cost of banks, especially small- to mid-size banks, so their costs are going to go down. The lower rates will also benefit our economy down the road. The ability of small- to mid-size companies to borrow to fund growth will increase substantially. Small cap company profits have the ability to grow extremely fast, which is what triggers MAJOR small cap advances within fairly small amounts of time.

Remember all the rate cuts in 2020 as a result of the pandemic? Who benefited more initially? It's an easy question to answer after looking at this chart:

The big drop in the fed funds rate benefited small caps much more than its larger-cap counterparts.

I've re-established my full small cap position and have even added a few small cap/mid cap stocks as a result of this morning's speech and subsequent market rotation.

Happy trading!

Tom