Consumers keep spending … the tailwinds Louis sees pushing small caps higher … Jason’s bullish take on small caps … a retirement “accelerator” has opened
“If there’s one thing I’ve learned in my 47-year career in the market, it’s that you should never doubt the resilience of the U.S. consumer.”
So says legendary investor Louis Navellier.
Last week, the latest batch of retail sales numbers supported Louis’ takeaway. Here’s Bloomberg with a quick recap:
US retail sales strengthened in September by more than forecast in a broad advance, illustrating resilient consumer spending that continues to power the economy.
The value of retail purchases, unadjusted for inflation, increased 0.4% after a 0.1% gain in August, Commerce Department data showed Thursday. Excluding autos and gasoline stations, sales climbed 0.7%.
The sales figures cap another likely quarter of solid economic growth and consumer demand fueled by a hardy labor market.
All year in the Digest, we’ve been tracking the health of the U.S. consumer
On one hand, we’ve highlighted many indicators pointing toward the deteriorating financial condition of the consumer. On the other hand, shoppers are still opening their wallets, driving the economy forward.
Remember, consumer spending accounts for nearly 70% of our nation’s GDP today. Thanks in large part to this robust consumer spending, the Atlanta Fed’s GDP Now model estimates that Q3 growth will come in at 3.4% – a healthy economy by any measure.
Meanwhile, inflation has been falling for months. Yes, it’s proved stickier in recent weeks, but the longer-term trendline is undeniably “down.” And Louis believes it’s fallen so low that another 25-basis-point interest rate cut in November is “practically guaranteed.”
Traders agree. As I write, the CME Group’s FedWatch Tool puts the odds of a quarter-point cut in November at 91%.
So, what do we get when we combine resilient consumer spending, falling inflation, and lower interest rates?
A bullish environment for stocks. And for Louis, there’s one corner of the market in particular that’s most attractive today.
It’s time for small caps to shine
From Louis:
There is a group of stocks that are poised to benefit more than just about anything else.
I’m talking about small-cap stocks, which are some of the biggest beneficiaries of lower interest rates. Smaller companies tend to have bigger debt loads than larger companies, and when interest rates decline, they benefit handsomely.
Also, consider the fact that this market has been shockingly narrow.
Since the spring of 2023, larger-cap stocks have outperformed the smaller stocks by a wide margin. You can see that in the chart below, represented by the SPDR S&P 500 ETF (SPY) and the iShares Russell 2000 ETF (IWM).
Source: StockCharts.com
As rates decline, I expect this performance gap to narrow.
Louis points out that this has already been happening as small caps have been rallying this fall.
For example, from the beginning of October through the 16th, the Russell 2000 shined. It climbed 2.7% while the S&P 500 climbed just 1.4%. Meanwhile, the Dow added 1.8% while the NASDAQ trailed them all, climbing less than 1%.
Source: StockCharts.com
Louis flags a few other tailwinds for small caps:
Seasonality – we’re entering perhaps the strongest part of the year for stock performance.
The presidential election – both candidates have been on the campaign trail making plenty of promises which has boosted moods on Main Street and Wall Street.
Q3 earnings season – the early results have surpassed analysts’ expectations. In fact, FactSet anticipates the S&P 500 will achieve much higher earnings growth than the current estimate of 3.4%.
Put it altogether and Louis concludes, “I’m very, very bullish right now.”
Louis’ colleague Jason Bodner is similarly bullish
If Jason is a new name to you, he’s the analyst behind Quantum Edge Pro, his quant-based investment service from our corporate partner, TradeSmith.
Both Jason and Louis anchor their market approaches in numbers. Though their respective systems have their differences, both share a central foundation: high-powered computers, running detailed algorithms, that scan the markets for the fingerprints of fundamental stock strength (e.g., growing sales and earnings growth, beating analyst expectations).
The centerpiece of Jason’s approach is an analysis of the “Big Money” – think enormous hedge funds that are driving billions of dollars’ worth of stock sales in a single transaction.
Here’s Jason explaining:
My analytics-based system and my proprietary Quantum Score evaluates the health and potential of more than 6,000 stocks. And it does so every day the market is open.
It’s a system that lets me spot the footprints of Big Money investors. This system gets me and my readers into these stocks early – when the Big Money buying is just getting started.
It’s legal, predictive – and powerful…
When a Big Money player embarks on a buying spree, it means demand for a stock is spooling up. Since supply is holding steady, there’s only one direction for the stock to move… up.
Like Louis, Jason is zeroing in on small-cap stocks today. And with the Fed now cutting rates, Jason is seeing Big Money traders becoming more active in the small-cap space:
Big Money is already turning its attention to small and mid-sized companies.
These are the largest investors on the planet that manage millions, billions, and even trillions of dollars.
I wrote sophisticated algorithms to identify where these flows are going – for both the market as a whole and right down to the individual stock.
What the data show about where the Big Money has been buying
Jason provided the chart below. It’s a snapshot of where the Big Money has been active between mid-summer and last week, broken down by market cap.
Here’s Jason with how to interpret it:
The Big Money buy signals (green bars) and sell signals (red bars) show us outsized buying and selling, which tells us what the big boys are doing with their massive amounts of money.
Look how lopsided the bars are in the smallest market cap (far left) and the next bigger size up – basically stocks $50 billion and under.
Over the last three months, 81% of all Big Money buy signals were in those stocks.
Source: MAPsignals.com
Jason points out that the “buy” signals in those smaller stocks outnumbered “sell” signals by nearly 2-to-1. And with the Fed indicating that it expects to cut rates a handful of times over the coming 12 months, we’re likely to see the Big Money continue to take outsized long positions in the small-cap world.
Jason is so bullish that he’s calling this period a “retirement accelerator window” for top-tier small caps:
This retirement accelerator window has already opened, but it’s set to grow into one of the biggest and best windows over the last 40 years.
The Fed is expected to continue lowering rates for the foreseeable future, so we’re looking at a potentially long and strong run for stocks.
Jason ran the numbers and found that the S&P 500 rallied 26.8% on average over two years when the Fed lowers rates while the economy is in decent shape – just like now.
But the more eye-catching part of his research is how small caps performed over that period. Back to Jason:
When we zoom in on smaller companies, we see even juicier profits.
The Russell 2000, the most widely followed small-cap index, surged 36.6% on average over the following two years.
Source: TradeSmith / FactSet
Jason just released his retirement accelerator research in full detail in a video bulletin. He dives into rate cuts, small caps, the Big Money, and how he’s positioning his portfolio right now.
Circling back to Louis…
Given his shared focus with Jason on quantitative investing, Louis has looked into Jason’s analysis. I thought you’d find his takeaway interesting:
I didn’t know it until I looked over Jason’s research, but some of the greatest picks I’ve ever made happened during these Retirement Accelerator Windows.
In fact, we went back and counted over 40 triple and quadruple-digit recommendations during one of these windows.
I want to be clear: I believe this is a massive wealth-building opportunity.
I’ve known Jason for years, and I’ve looked over his research from top to bottom. This is a tremendous opportunity.
We’ll keep you updated as Louis and Jason continue releasing research, and potentially, even some small-cap names they like. On that note, in Jason’s research video, he shares one of his favorite small-cap stocks today which he believes has triple-digit return potential over the coming months.
Bottom line: the pros are now moving their billions into small caps. And history suggests more buying pressure is on the way. If you want to ride this historical outperformance, make sure you have small caps represented in your portfolio.
Have a good evening,
Jeff Remsburg