Don’t Fight the Tape.Don’t Fight the Tape. The Market Is on Small Caps.

July 25, 2024

Kevin Flanagan

Head of Investment and Fixed Income Strategy

Jeff Weniger, CFA

Head of Equity Strategy

Sometimes the market simply wants to latch onto a good story. There are several making the rounds this summer.

The big one is the spike in the small-cap Russell 2000 since the release of the latest Consumer Price Index (CPI) report, which shocked the market by printing 0.0% month-over-month in June. According to Bloomberg’s John Authers, the 11.5% pop in that index in the first five sessions after the CPI release was only exceeded by spikes witnessed amid the crises of “(the 1998 collapse of hedge fund) Long-Term Capital Management, Dot-Com, the Global Financial Crisis, the 2011 U.S. debt downgrade and the pandemic.”

A wide assortment of balance sheets can be found across small caps, ranging from rock solid fortresses to companies knocking on the doors of bankruptcy court. No matter. The market wishes to paint U.S. small caps with a broad brush, one that has them receiving much-needed respite on their variable rate debt while fixed-rate large caps see no immediate benefit.

How large is the fixed versus floating debt discrepancy up and down the market cap spectrum? At year-end, about 30% of small caps’ debt was variable rate, while the proportion for large caps was 8%, according to Voya. But to hear the market chatter, you would think the proportions are 100% and 0%.

Because of this perception about their susceptibility to short-term interest rate oscillations, the market is buying small caps on the floating rate theme amid the scramble to price in near certainty that the Federal Reserve (Fed) will cut rates at its September 18 meeting.

Whether lopping 25 or 50 or 75 basis points (bps) from small caps’ cost of debt truly moves the needle is not what matters. What matters is the bull market is finding more winners now and attaching the stories to fit the case, as it always does.

It is not all about rate cuts. Former President Trump is dominating the news cycle. As his victory odds rose after both the June 27 debate and the July 12 assassination attempt, the prospect of corporate tax hikes waned. The market has been spending much of 2024 trying to put together stories to broaden the bull beyond Silicon Valley. Now it has a few to run with.

You can see the wider participation in the market’s internals, particularly when it comes to the scare zones. A poster child for the bears’ consternation for a solid five quarters has been regional banks, owing to the Silicon Valley Bank (SVB) and Signature Bank panics in spring 2023. Many investors haven’t wanted to touch Mid-Cap and Small-Cap Value because of the regionals. Well, regional banks as a collective are at 52-week highs. Even REITs, which many have left for dead, are running. They are one of the hottest groups right now, rallying since April to new 52-week highs in recent sessions.

Trump-specifically, oil services have spun inexorably higher since the failed assassination attempt. That Trump trade is clear with one glance at the official 2024 GOP platform. An excerpt: “We will DRILL, BABY, DRILL and we will become Energy Independent, and even Dominant again.” Trump “on,” oil services “on.”

Now watch the chain of events from the near-assassination to a Jay Powell-as-savior-of-the-Russell 2000 bull story:

Trump victory flips to “on” in our industry’s “on/off” parlance. That puts oil production in ostensible expansion mode, bringing forth the possible prospect of lower gasoline prices. That feeds speculation that the Fed can sigh relief on inflation, fueling more rate cuts, and voila! The fixed versus floating story stays in the conversation.

Don’t fight the Fed? Sure. But don’t fight the tape either. The market has some good stories, and it is sticking to them.

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Head of Investment and Fixed Income Strategy

Kevin serves as the Head of Investment and Fixed Income Strategy. In this role, he writes macro and fixed income-related content and works closely with the sales, research and marketing teams. In addition, Kevin conducts client-facing webinars and meetings, providing expertise on WisdomTree’s existing and future bond ETFs. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was Managing Director and Chief Fixed Income Strategist for Wealth Management. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S. in Finance from Fairfield University.

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Jeff Weniger, CFA

Head of Equity Strategy

Jeff Weniger, CFA, has been with WisdomTree since 2017 and serves as the Head of Equities. He shapes the firm’s market outlook through a combination of macroeconomic and fundamental analysis. With more than two decades in investment strategy, Jeff is known for his work on market cycles and valuations. Before joining WisdomTree, Jeff was with BMO Private Bank and BMO Global Asset Management for 11 years. At BMO, he sat on the firm’s Asset Allocation Committee and co-managed ETF model portfolios across the U.S. and Canada. In 2013, at age 32, he became the youngest member of BMO’s Global Investment Forum. When he left BMO to come to WisdomTree, his final role was Director, Senior Strategist in the Office of the CIO in 2017.

Jeff is a frequent television guest on networks such as CNBC, Bloomberg, and Schwab, with regular print appearances in The Wall Street Journal, Barron’s and Reuters. He also appears weekly on the Behind the Markets podcast and is a regular on SiriusXM’s The Business Briefing. On X, Jeff has developed one of the larger followings in financial media. He earned a B.S. in Finance from the University of Florida and an MBA from the University of Notre Dame. He has held the CFA charter since 2006.

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