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Liz Looks at: Changing Market Tides

Turn, Churn, Earn?

A palpable shift is happening in markets. And it’s a shift that can be seen in multiple places. Some may call it a rotation, some may call it seasonal strength, some may call it resiliency. I’m choosing to call it a hand-off in the longest relay race we’ve ever run.

Here’s where it’s happening…

Monetary → Fiscal → Corporations

Last week, I wrote about the Fed finally starting its tapering program, which was a shift in and of itself and deserved a whole article. That move marked the beginning of a larger shift from monetary policy dependence to the next bedrocks of stability—namely fiscal spending and corporate strength.

The recent infrastructure spending bill that finally made it through Congress promises to deliver the infrastructure refresh we’ve been hoping for since 2016. And this comes just before a larger spending package that includes social spending and climate as its main components. Why does this matter for markets? Because for the last 18+ months, much of the upside and ease of entering the stock market has been greased by the Federal Reserve’s easy stance and flood of liquidity.

With some of that sloooowly petering off, and with the discussion of rate hikes on the horizon, a hand-off to expansionary fiscal policy (different from rescue policy) is a welcome addition.

In more good news, although we’ve seen the peak in earnings growth already, so far Q3 earnings are holding strong despite inflationary pressures and the frustration of supply chain woes. Corporations have built up record high profit margins that are able to absorb increased costs and suggest a revival in CapEx spending in 2022.

Investors have more to look forward to in this cycle.

Big → Small

Shocking that another article from me mentions small-caps. In all seriousness and intellectual honesty, the hand-off from big companies to small companies is one I think has real legs. Since the end of September, the small-cap Russell 2000 has returned 9.9% compared to the large-cap dominated S&P 500’s 8.6%. That may not seem like a big spread, but when put in the context of small-caps having moved sideways for much of the year until recently, the breakout of the Russell 2000 is notable.

This is a time of year when investors evaluate how they want to be positioned for the year to come, and I think investors can benefit from having a position in smaller stocks. For one, small-caps are the only major asset class to outperform inflation every decade since the 1930s. Given yesterday’s hot CPI print (+6.2% y/y) and the fact that it was the sixth month of inflation above 5%, this performance fact alone is reason to see opportunity in small-caps.

But in case you need more, we’re still in the midst of an economic expansion that should last into 2022 barring any policy errors or new shocks. Small-caps are more economically sensitive, which makes them the size category that should benefit from an expanding economy.

Lastly, the sector make-up of small-caps naturally insulates them from interest rate volatility. The largest sectors in the Russell 2000 are Health Care (21%) and Financials (15%), while the largest sectors in the S&P are Technology (26%) and Communications (16%). The latter two sectors are much more susceptible to pressure as rate volatility picks up (which it is likely to do in 2022), whereas Health Care is less dependent on rates and Financials actually benefit from rate rises.

Pandemic Stocks → Endemic Stocks

To round out this shift, there’s a decidedly optimistic feel in the air after positive news on Covid therapeutics, booster shots, and vaccine availability to children. After many stops and starts, it seems like we’re finally in a forward progress mode that will continue. Markets are starting to trust that, too and there’s opportunity for another leg higher in those so-called re-opening and cyclical stocks that have been held back by bursts of virus fears.

Travel and leisure, Industrials, Financials, Energy, Consumer Discretionary, and small-caps are all poised to do well in this next hand-off. There is still inflation and supply chain frustration present, but for the time being markets are looking through it and taking the hand-off in stride.


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Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young Thomas is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.

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Liz Young Thomas ABOUT Liz Young Thomas Liz Young Thomas is SoFi's Head of Investment Strategy, responsible for building out the function and providing economic and market insights. Prior to joining SoFi, Liz was the Director of Market Strategy at BNY Mellon Investment Management where she formulated and delivered views on macroeconomic themes and their effects on capital markets. Earlier in her career, she was a due diligence analyst at Robert W. Baird and a research analyst at BMO Global Asset Management. Liz is passionate about educating others on markets and investing in order to help people feel empowered to take a more active role in their financial futures.

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