Finding Good Times in 'Bad' Data

We wouldn't normally celebrate slow wage and payroll growth...

And yet, that's exactly what's happening today.

The U.S. added 175,000 jobs in April, its smallest gain in six months. Average hourly earnings rose just 3.9% year over year... their slowest rate in three years.

Folks are still getting hired. They're earning higher wages. That's not why the market is excited, though.

Instead, folks are thrilled to see these numbers start to weaken a bit... because it could be a sign that the economy is cooling down.

And the Federal Reserve might finally be able to cut interest rates.

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 has investors excited, though. 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 last month, 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.

Fed Chair Jerome Powell showed signs of concern before this report came out. But weaker payroll data and higher unemployment show that the rate hikes are finally working. The Fed's tighter monetary policy is doing what it's supposed to do.

That's great for the market. The central bank can afford to be less restrictive... and the economy is still humming along.

This Goldilocks economy is particularly good for one type of public company...

I'm talking about 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.

Regards,

Joel Litman
May 13, 2024

P.S. The macro environment is looking bright for microcaps... and another short-term catalyst makes this the perfect time to buy in.

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