Why Are Small-Cap Stocks Getting Hammered?
We have some wonderful small-cap stocks in Red-Hot Canadian Small-Caps and Red-Hot Asian Tigers, and many of them made upside breakouts recently, powering higher on good news. Even more recently, some are going down, down, down. They aren't alone. Small-caps are generally being folded, spindled and mutilated. What's the deal?
The deal is that many investors are expecting a recession. We can tell that because the yield curve has inverted: the 2-year note, the 5-year, the 10-year and the 30-year all trade below the Fed funds rate. Each time this has happened over the last two-score years, the next six months has seen a significant rally in bonds, a 6% decline in commodity prices and underperformance by small-cap stocks.
In other words, investors believe that the Fed has overdone it on tightening the Fed funds rate, and an economic slowdown is coming. They're getting out of the way -- moving to the safety of bonds and dumping volatile small-caps.
It becomes something of a self-fulfilling prophecy. The more investors follow this trend, the worse it gets.
However, before you go running for the hills, here are some points to consider:
1) "The market has predicted nine of the last five recessions." That famous quote comes from Nobel prize winning economist Paul Samuelson. In other words, just because the market fears it doesn't make it so.
2) China's economy likely grew 10.4 percent in the first half from a year earlier, accelerating from the 10.3 percent pace of the first quarter, a government think-tank said in a report published on Tuesday. Indeed, some believe China's economy could grow at over a 10% pace ALL YEAR!
3) India's $775 billion economy expanded 9.3 percent from a year earlier in the quarter ended March 31, rounding off the financial year with growth of 8.4 percent, the fastest after China among the world's 20 biggest economies. And that growth is continuing. In May, production at India's factories, utilities and mines rose 8.9 percent from a year earlier. That follows April's 9.5 percent gain.
4) It's not just India and China. The United Nations raised its forecast for global economic growth this year to 3.6 percent on Tuesday, as major economies rebounded and emerging nations maintained their momentum. That's up from the 3.3% growth they predicted earlier. The IMF has also raised its predictions for global growth -- TWICE.
5) Individual metals are in short supply, and those supplies are getting tighter. Example: Chinese stainless steel production will rise more than 25 percent to 4.7 million tons this year, boosting demand for nickel by 35,000 tons, or half the projected increase in global demand. That's according to Beijing Antaike Information Development Co., which advises the Chinese government on industry policies.
Gold is trending up. Silver is trending up. Copper is trending up. Am I boring you? Hell, I'm getting excited!
People are selling stocks for the wrong reasons: They believe an economic slowdown is coming and there's no sign of that. Meanwhile, The small-cap stocks I recommend are LEVERAGED to the price of the underlying metals. So, if people are selling them off, we'll be able to pick them up at firesale prices. It might take a month, maybe longer, but the people who sold those stocks are going to want them back ... and they'll buy them at higher prices.
The deal is that many investors are expecting a recession. We can tell that because the yield curve has inverted: the 2-year note, the 5-year, the 10-year and the 30-year all trade below the Fed funds rate. Each time this has happened over the last two-score years, the next six months has seen a significant rally in bonds, a 6% decline in commodity prices and underperformance by small-cap stocks.
In other words, investors believe that the Fed has overdone it on tightening the Fed funds rate, and an economic slowdown is coming. They're getting out of the way -- moving to the safety of bonds and dumping volatile small-caps.
It becomes something of a self-fulfilling prophecy. The more investors follow this trend, the worse it gets.
However, before you go running for the hills, here are some points to consider:
1) "The market has predicted nine of the last five recessions." That famous quote comes from Nobel prize winning economist Paul Samuelson. In other words, just because the market fears it doesn't make it so.
2) China's economy likely grew 10.4 percent in the first half from a year earlier, accelerating from the 10.3 percent pace of the first quarter, a government think-tank said in a report published on Tuesday. Indeed, some believe China's economy could grow at over a 10% pace ALL YEAR!
3) India's $775 billion economy expanded 9.3 percent from a year earlier in the quarter ended March 31, rounding off the financial year with growth of 8.4 percent, the fastest after China among the world's 20 biggest economies. And that growth is continuing. In May, production at India's factories, utilities and mines rose 8.9 percent from a year earlier. That follows April's 9.5 percent gain.
4) It's not just India and China. The United Nations raised its forecast for global economic growth this year to 3.6 percent on Tuesday, as major economies rebounded and emerging nations maintained their momentum. That's up from the 3.3% growth they predicted earlier. The IMF has also raised its predictions for global growth -- TWICE.
5) Individual metals are in short supply, and those supplies are getting tighter. Example: Chinese stainless steel production will rise more than 25 percent to 4.7 million tons this year, boosting demand for nickel by 35,000 tons, or half the projected increase in global demand. That's according to Beijing Antaike Information Development Co., which advises the Chinese government on industry policies.
Gold is trending up. Silver is trending up. Copper is trending up. Am I boring you? Hell, I'm getting excited!
People are selling stocks for the wrong reasons: They believe an economic slowdown is coming and there's no sign of that. Meanwhile, The small-cap stocks I recommend are LEVERAGED to the price of the underlying metals. So, if people are selling them off, we'll be able to pick them up at firesale prices. It might take a month, maybe longer, but the people who sold those stocks are going to want them back ... and they'll buy them at higher prices.
Check out my new gold and energy blog at MoneyAndMarkets.com
posted by Sean Brodrick @ 12:40 PM
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