Bill Gross recently said that stocks are dead, and that the “cult of equity” that investors have become used to is over. Needless to say, his statement has attracted Wall Street’s attention, though he hasn’t been the first to trash stocks in recent years.
But I couldn’t disagree with him more (and I also think these comments are rich coming from the managing director of Pimco, a global bond giant!) and I’ll tell you why: We’ve had a rough couple of years, there’s no doubt about that, but now is exactly the time when individual investors should be jumping back into the market — especially where small caps are concerned.
You heard me right. Despite what people like Bill Gross are saying, there are great opportunities in stocks right now, and I’m eyeing small caps as we head into the final half of the year. Since August is historically a slow time for stocks (hence the old Wall Street adage, “sell in May and go away”), and with trading typically picking up after Labor Day weekend, sentiment will soon start to turn bullish.
This year, the Federal Reserve’s annual Jackson Hole Symposium falls on Aug. 31, and investors will be paying close attention for signs of another round of quantitative easing (QE3) to come out of the meeting — another catalyst that would be good for stocks.
But even if the market doesn’t get what it’s looking for out of the Fed’s meeting, the “Bernanke Put” — where the market will be assured as long as it knows the Fed will step in with aggressive action as necessary — is firmly in place. Boding even better for the market in the final half of the year is the tremendous cash that businesses have on their balance sheets and the pent up need to grow and innovate through increasing research and development (R&D) endeavors, and accelerating mergers and acquisitions (M&A) activity.
With regard to small cap stocks, there are many great opportunities out there, and even more that will present themselves as market sentiment picks up in the third and fourth quarters. I frequently hear from individual investors that they are nervous to invest in small cap stocks because they carry a reputation of being more volatile and are more risky then blue chip stocks. That is absolutely true.
But, remember that the risk goes both ways. When Standard & Poor’s downgraded U.S. credit last year, the Russell 2000 small-cap index lost 17% on the news. This was a significant, especially in comparison to the other leading indexes which were not hit quite as hard. Small caps move with the market, and with the S&P 500 up 10.8% for the year and the Dow up 7.3%, the Russell 2000 is lagging the group with its 7.2% increase.
However, I see this as a sign of the tremendous opportunities for growth in small caps, as the discrepancy in their movement shows me that they just have that much more to gain.
Now, as we find ourselves on the cusp of a market turn, now is the time to consider adding small caps to your portfolio. We are heading into a more protracted rally, and small-caps have a tremendous opportunity to catch a bid, especially as they gain more coverage on Wall Street and garner more attention by other businesses as M&A activity picks up.