There’s one equity class that is likely to seriously outperform for the foreseeable future.
It offers the best opportunities in the market right now, in my view.
But before we get to that, a bit of context…
Stocks have faced a lot of headwinds recently.
In response to the highest inflation in 40 years, the Federal Reserve took rates to a 16-year high. That stoked fears that the central bank would push the U.S. economy into a recession.
In the third quarter, bond yields rose to their highest level in 16 years.
Oil prices have been moving back toward $100 a barrel, thanks to rising global demand and supply cuts by Russia and Saudi Arabia.
And yet consumers continue to spend. The economy remains at full employment. Third quarter GDP growth was 5.2%, based on the latest estimate. (That’s a long way from a recession.) And the fourth quarter should be stronger still.
The October inflation reading was the lowest in two years. That took the likelihood of further interest rate increases by the Fed off the table. And ignited a rally in stocks.
Despite the steepest rate hiking cycle by the Federal Reserve in four decades, the economy has remained so much stronger than expected.
Recently, the Fed released the results of its Survey of Consumer Finances.
Here are just a few highlights. (Please note that these figures were adjusted for inflation, so these are real gains.)
- Average family income rose 15% from 2019 to 2022. This increase was widespread across the income spectrum, from low-income families to wealthy households. It also spanned racial and ethnic groups. The median income rose about 3%.
- U.S. households’ net worth rose 37% over the three-year period. That’s the biggest increase in net worth since the Fed started surveying households in 1992. And it was “universal” across different types of families – income groups and races – according to the Fed.
- Homeownership increased over the period. Two-thirds of American families are homeowners. The median net home value – home value minus debt owed on the home – rose from about $139,000 to $201,000.
- There was broad participation in the good news. For example, the average net worth for Black families rose 28% to $211,500 – the biggest gain of all racial groups. Hispanic families saw their average net worth rise 19% to almost $228,000.
In short, the U.S. economy remains strong. That’s good for corporate earnings, the market and certain stocks.
And right now it’s key that you continue to build out your portfolio of high-quality microcaps.
Microcaps are the most volatile class of stocks. They are also the most profitable in a rising market.
As you can see in the chart below, microcaps outperform everything else over the long haul.
It isn’t very close: $1,000 invested in large caps a century ago is worth $12.3 million. The same amount invested in small caps is worth $38.5 million. And $1,000 invested in a diversified portfolio of microcaps is worth $67.8 million.
That’s $55 million in outperformance.
When investors start to prioritize corporate profits rather than what the Federal Reserve will do next, I expect stocks to rally.
And when they do, it will happen – as it always does – without advance notice.
And microcaps are likely to lead the charge.