The big thing you need to know: Small Caps got a boost from the better-than-expected jobs report on Friday, reinforcing our belief that a return of economic tailwinds is the catalyst they need to take valuation and positioning to the next level.
If you’d like to hear more, here’s another 3 minutes.
Now, let’s jump into the details.
Our Main Takeaway: Small Caps Got a Boost from the Jobs Report on Friday, Adding to Our Belief That a Return of Economic Tailwinds Is the Catalyst They Need to Outperform
ed, at the close, the Russell:
The big move in Small Caps on Friday is only surprising to some extent because their fate throughout 2024 has mostly been a function of increasing or decreasing dovishness around the Fed.
But equities focused more on the strengthening of the soft-landing thesis on Friday than the dialing down of Fed cuts, benefiting Small Caps, which we see as a healthy, and completely reasonable, development for this overlooked corner of the US equity market. Indeed, over time Small Caps have tended to outperform Large Caps when jobs growth is ramping up, and to underperform Large Caps when jobs growth is deteriorating or stagnant.
It’s worth noting that Friday’s jobs report was just one of several positive developments for the soft-landing thesis and the Small Cap trade last week. Another was the ISM services release, where the headline index moved up vs. the prior quarter and beat expectations. Over time, we’ve seen a decent relationship between Small/Large performance and trends in this indicator.
US economic surprises also continued their recovery into positive territory.
of some modest improvement in:
We’ve been arguing that Small Caps are no longer cheap and oversold, and that while they have room to run on both positioning and valuation, they’ve needed something besides Fed cuts to get them to the next level. We’ve theorized that a return of economic tailwinds could be that new catalyst. Friday’s outperformance in the R2000 following the jobs number increases our confidence in that idea.
news is that positioning in R:
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
