Investor Essentials Daily

Finding silver linings in ‘‘bad’’ data

May 13, 2024

The recent U.S. job report has sparked optimism among investors and economists despite its modest appearance, showing the smallest job gain in six months with only 175,000 new jobs and the slowest wage increase in three years at 3.9%. 

However, this slowdown is seen as a potential cooldown from years of overheated economic activity, signaling the onset of a “goldilocks” economy—not too hot, not too cold. 

With the new data, there’s renewed hope for interest rate cuts, anticipated as soon as September. 

This shift suggests that the economy may gently simmer without overheating, offering a more favorable environment for growth, especially for microcaps.

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The recent U.S. job report has given investors and economists a rare reason to celebrate despite its seemingly modest numbers. 

In April, the nation added 175,000 jobs, marking the smallest gain in half a year. Meanwhile, average hourly earnings rose by a mere 3.9% over the past year—the slowest increase in three years. 

However, this slowdown in wage and payroll growth is not a cause for concern; rather, it’s a sign of potential relief from persistent economic heat.

Economists like to talk about a ‘‘goldilocks’’ economy, it’s not too hot and it’s not too cold. It’s just right.

The economy has been far too hot for years. Investors started to get excited about a cooldown and potential rate cuts at the start of the year. High first-quarter inflation numbers quickly dashed those hopes.

The latest jobs data is reviving investor hopes. Wage growth is positive, but not overly hot. Employment is falling… but it’s not falling off a cliff.

In short, the Fed’s ‘‘goldilocks’’ environment seems to be materializing. It has some wiggle room to ease interest rates while letting the economy simmer.

As recently as April, it looked like we wouldn’t get any rate cuts until at least December. We could have gone the entire year without a single cut. The market even briefly started prepping for another hike.

Now, investors are “all in” on the rate-cut narrative again. They anticipate a rate cut in September… and another in either December or early next year.

Jerome Powell showed signs of concern before this report came out, but weaker payroll data and more unemployment show that the rate hikes are finally working. The effect of the tight monetary policy is finally coming into play, and it isn’t hurting the economy. Rather it is gradually cooling it.

That’s great for the market because it means the Fed won’t be as restrictive, but the economy is still humming along.

This goldilocks economy is particularly good for one type of public company, microcaps…

Microcaps are usually defined as stocks with market caps below $2 billion. These companies tend to struggle in a high-rate environment. Wary banks prefer to lend to larger, more established companies.

On the other hand, microcaps do great when interest rates are low. They can borrow cash to grow… and since they’re so tiny, they have the most room to grow.

As investors reacquaint themselves with the idea of a rate cut this year, they’ll turn to microcaps. These tiny stocks could be on the cusp of a huge rally.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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