Although I am not an economist, I have been in the investment community for 44 years and have been through a number of bull-and-bear markets. I waited until the second quarter of this year to put together my market comments, as I was looking for a market direction. Although the economy is not quite on firm ground, we have seen a number of business segments posting increases in growth. Among them are the retail, travel, and automotive segments, and with interest rates at record lows the housing market is also showing an increase. In May, new home sales had increased the fastest in two years, suggesting a recovery in the housing market. With low inventories of unsold new homes, we will probably see a continued recovery in the housing market. Equally, with the continued vulnerable world market, it seems to me that more and more investors will flock to the U.S. stock market. The housing market has been so decimated that any increase in this sector could be considered a major improvement.
My colleagues at the commercial banks also tell me that they are seeing growth in their loan portfolios and in the banks in general, and that the housing market is working out many of its problems similar to how the banks are alleviating their own problems. This kind of optimistic news coupled with an improvement in unemployment, although small, has caused an increase in consumer confidence and spending. But in spite of all this good news, I believe we will still continue to experience a slow economic improvement.
For example, the European debt crisis was a major factor in 2011’s economic declines and, although the EU is making strides to work through these problems, it will no doubt continue to have an impact on the economy for quite a while.
Furthermore, in February, the Federal Reserve publicly announced that they expected to keep interest rates to near zero into 2014, and issued a detailed, long-term forecast to convince investors that by keeping rates near zero they would stimulate growth. However, I believe that the Fed did this because no one can predict when unemployment and other worrying economic metrics will really start to improve, or when the recovery will be strong rather than modest.
At this point I must state personally that I am angered over the rules and restrictions regarding raising money and reporting put on the small cap markets by the regulatory authorities. While small cap stocks are risky investments, ever since our nation was formed it has grown and prospered from the contributions made by small companies. If the regulatory agencies want to institute restrictions that's fine, but they should not prevent small companies from growing and prospering. What is going on in the market right now is that companies are being regulated to a point where many are going out of business, mostly because of the costs associated with financial reporting.
Despite the obstacles the economy has been subjected to over the year, small cap companies are nonetheless finding the ability to thrive. The Russell 2000 index, which tracks small companies, is close to its record high with a rise of about 10-11 % so far this year. It is surpassing the Russell 1000, which is the large cap stock index, as well as the S&P 500. As a result, small cap stocks with market caps under $2 billion have become very attractive. My point is that investors have a huge appetite for risk, and their investments in small cap stocks which show signs not only of a recovery but also that investors believe that large cap stocks are getting too expensive. According to Lipper, $ 2.4 billion in capital has gone into these small cap stocks in 2012 so far. According to its surveys, JP Morgan has said that US Investors seem to be only 22 % invested and have a lot of cash in the bank. It also expects to see a lot of mergers and acquisitions in the small cap sector adding to the performance of many small cap, mid cap, and growth funds.
In summary investors can certainly feel better about the market, as the economy is showing signs of life and growth. Many economists have told me that the stock market is in its third year of recovery. The large cap stocks have done well however, the market has naturally lost breadth and power. I believe that we are now in the stage of recovery where small cap stocks are now looking more attractive.
Thus, this is the time when investors should reevaluate their investment strategy and take advantage of the small cap sector, as well as continue to be invested in the large cap stocks. The small cap stocks are generally selling at multiples of the 2-4 X range, giving investors the opportunity to buy in at reasonable prices. Most of the entire risk-reward ratio is in the investor’s favor.
In conclusion, I believe that 2012 is shaping up to be a very interesting year. There is a lot of potential for everyone's investment strategies, and it seems to be an opportune time for investors to shift their focus to small cap stocks.
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