I’m getting tired of the US-China trade circus. That’s because the US has already won and it’s in China’s best interest to not drag out any further.
The proof of victory is best understood by appreciating that the US economy has put up another +3.2% GDP quarter while China continues to weaken. I am not talking about the 100% fabricated GDP growth rate reported by the un-elected Chinese government. I mean the proof of slowing in all the independent sources of data like international corporations noting significant weakness in China.
Reity, if this is all so obvious, then why is the market dropping at this time?
The S&P rallied over 25% from the Christmas Eve low to the highs of last week. So investors were happy to find a convenient excuse to take some profits off the table.
Or to put it another way, this is the pause that refreshes before the next leg higher. This brings us around to the main topic today…
Where to Find Outperformance the Rest of the Year
So yes, we will make higher highs this year. And yes, it will be above 3,000. But do not expect any repeat of the torrid gains so far in 2019. Instead we will slow down to a more typical 5-10% a year pace.
If that is fine by you, then just please put all your money in SPY and call it a day. For those hoping for a chance at outperformance I think you need to appreciate this chart below.
What it shows you is that since making highs at the end of August 2018 the S&P is basically flat while mid caps are down -5.5% from their peak and small caps an even greater laggard at -9.4%.
So a lot of ink has been spilled talking up the excitement of the S&P 500 making new highs last week. However, as we go beyond the headline stocks we see there is actually a lot more room for these smaller stocks to regain their lost luster.
That current deficit from the highs should become solid outperformance as the year progresses. Thus, I highly recommend that you overweight small caps going forward. Ditto for many attractive mid caps you will find trading well off their 52 week highs.
What to do Next?
Not only do small caps look the best right now, but they also enjoy a considerable long term performance advantage over large caps. In fact, over the last 30 years large caps have rallied +9,035%.
That sounds pretty good until you appreciate the vastly better +12,241% return for small caps. This long term edge had me on the verge of making a focus on small cap stocks lesson #10 from my recent webinar. Instead I left it at just 9 lessons learned over my 40 year investment career.
To help you track down more attractive small cap stocks, please consider these resources:
Stock Screener (just adjust market cap filter)
Wishing you a world of investment success!
…but my friends call me Reity (pronounced “Righty”)
CEO, Stock News Network
To see Steve Reitmeister use his 40 years of investment experience to hand select the best POWR Ratings stocks, then check out the Reitmeister Total Return portfolio.
shares . Year-to-date, has gained 15.78%, versus a % rise in the benchmark S&P 500 index during the same period.
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