Advancing from the Debt Ceiling: An Analysis of the Current State of the Market
The recent resolution of the debt ceiling debate has led to increased optimism and risk-taking among investors. This is particularly good news for smaller stocks, which are likely to experience a surge in demand from investors looking to take advantage of the new market conditions. In this blog post, we take a closer look at what is happening in the S&P 500 and how it affects our next moves.
The Debt Ceiling Agreement: A Marginal Boost to Stocks
The agreement on the debt ceiling has been approved by the House and is expected to be approved by the Senate soon. This has been marginally good news for stocks, with the S&P 500 up to 3% in the last week. While there are still persistent concerns about the economy, it appears that the debt ceiling won’t be one of them.
Washington’s Last Minute Deal: A Real Surprise
The real surprise lies in the fact that Washington did not arrive until the last minute to reach an agreement. Now, the focus has returned to the Federal Reserve and the fight against inflation. The recent chart of the S&P 500 index shows that it is near the top of its two standard deviation range. This does not necessarily imply that it is going to pull back, but it sets the stage for potential mean reversion in the near future.
The Labor Market Dilemma
With jobs report due tomorrow, the labor market remains strong, which is both good and bad news. It’s good news because people have jobs, but bad news because it makes it more likely that the Fed will continue to raise rates to combat inflation. However, the Fed does not seem to be in a rush to raise rates at the moment, with an 80% chance of a rate hike at the June FOMC meeting (according to the futures market). However, there is still a 50% chance that the Fed will raise the rate at the July meeting.
The Fed’s Dilemma: A Soft Landing
The Fed is trying to achieve a soft landing by fighting inflation while keeping the economy running steadily. The Fed aims to accomplish this without causing any significant setbacks or affecting the economic recovery. However, it remains to be seen whether this is possible, although it has been accomplished in the past. More rate hikes could introduce volatility to stocks in the coming weeks.
Preparing for Risk-Taking
With the debt ceiling issues mostly out of the way, market volatility has faltered. Lower volatility generally implies that investors are willing to take more risks with smaller stocks and value names. This is good news for us since we tend to operate in this area. Investors taking more risks with smaller stocks and value names could be a great opportunity in the following weeks.
What’s Next?
As we advance from the debt ceiling, it’s essential to keep an eye on the S&P 500 and other relevant market indices, the Federal Reserve, and the labor market. The key takeaway here is that the market is volatile, and people need to be cautious with their decisions. It’s necessary to analyze the data carefully and make informed choices by considering the possible risks and rewards.
Expanding on the Topic: Why Small Stocks are the Next Big Thing
Small-cap stocks, especially those under $10 or micro-cap stocks, have become increasingly popular among investors in recent times. The growing interest in small-cap stocks is largely due to the high returns they offer, compared to blue-chip stocks. Here are some reasons why small-cap stocks are the next big thing:
1. High Growth Potential
Small-cap stocks are more likely to have higher growth potential, especially since they are operating in a relatively new or emerging market. This means more room for expansion, which can lead to higher returns for investors.
2. Diversification Benefits
Investing in small-cap stocks allows investors to diversify their portfolios better. Since small-cap stocks have less institutional investment, they tend to be less closely correlated with the broader markets, offering investors a chance to diversify their portfolios more effectively.
3. Market Inefficiencies
Unlike large-cap stocks, small-cap stocks are less researched and analyzed by analysts, which can lead to market inefficiencies. This means that small-cap stocks are more likely to be mispriced, creating opportunities for investors to generate higher returns.
4. Agility and Adaptability
Small-cap companies operate with a lean structure and are more agile, making it easier for them to adapt to the ever-changing market landscape. In comparison, larger companies often have more significant structural or operational impediments, making them less adaptable in an uncertain market.
Conclusion
In conclusion, it’s challenging to tell what’s next for the markets. With the recent resolution of the debt ceiling, investors can expect increased optimism and risk-taking. Small-cap stocks may become the next big thing, offering investors high growth potential, diversification benefits, and an agile and adaptable market structure. However, it’s essential to analyze the data carefully and make informed choices while keeping an eye on inflation, the Federal Reserve, and other key variables that can impact the markets.
Summary
The recent resolution of the debt ceiling debate has created a more optimistic environment for investors, leading to increased risk-taking. Small-cap stocks, particularly those under $10 or micro-cap stocks, may be the next big thing in the markets due to their higher growth potential, diversification benefits, market inefficiencies, agility, and adaptability. The market remains volatile, and investors need to be cautious with their decisions, analyzing the data carefully and considering the possible risks and rewards.
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Now that the debt ceiling debate appears to have been resolved, we could see more risk-taking among investors. That’s good for smaller stocks, like the ones we buy for our portfolio. Below I take a closer look at what is happening this week in the S&P 500 (SPY) and how this affects our next move. Read on for more….
(Enjoy this updated version of my weekly comment originally posted on June 1street in it POWR Stocks Under $10 Newsletter).
The debt ceiling agreement has been approved by the House and seems ready to be approved by the Senate. That has been marginally good for stocks, with the S&P 500 (TO SPY) up to 3% during the last week.
There are still plenty of concerns about the economy, but it looks like the debt ceiling won’t be one of them.
It is not really a surprise that the US avoided a default (whose consequences could have been catastrophic).
The real surprise is that Washington did not arrive until the last minute to reach an agreement. Now the focus will return to the Federal Reserve and the fight against inflation.
You can see from the chart above, the SPX (S&P 500 Index) is near the top of its two standard deviation range.
That does not necessarily imply that it is going to pull back, but mean reversion is a real thing with stocks, so there could be some selling pressure in the near future, although it will most likely be short-lived.
With the debt ceiling issues mostly out of the way, tomorrow’s jobs report will be the focus for many investors.
The labor market remains strong, which is good and bad. It’s good because people have jobs (obviously). It’s bad because it makes it more likely that the Fed will continue raising rates to combat inflation.
However, the Fed does not appear to be in a rush to raise rates at this stage. There is currently an 80% chance of a rate hike pause at the June FOMC meeting (according to the futures market).
However, there is more than a 50% chance that the Fed will raise the rate at the July meeting.
The Fed is trying to achieve a soft landing. That is, they want to combat inflation (sending it down) without torpedoing the economy.
I’m not sure it’s possible, although it has been accomplished in the past. We’ll have to wait and see if they can capture that magic this time.
Volatility, as seen on the VIX chart below, faltered during the final days of the debt ceiling debate.
However, you can see where the VIX is now approaching 15. Below 15 is generally considered a low volatility regime for the market.
It is not unusual for market volatility to subside as we head into the summer vacation months.
However, it is a little different this year with at least one interest rate hike expected during the summer term.
Although the Fed did a reasonable job of telegraphing its moves, further rate hikes could introduce some volatility to stocks in the coming weeks.
Ultimately though, we may be nearing a period where investors are willing to take more risk on stocks.
Lower volatility generally means investors will take more risk with smaller stocks and value names. That certainly means good things for us, which is the area where we tend to operate.
What to do next?
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All the best!
jay solooff
Chief Growth Strategist, StockNews
Publisher, POWR Stocks Under $10 Newsletter
SPY shares closed at $427.92 on Friday, up $6.10 (+1.45%). Year-to-date, SPY has gained 12.32%, versus a percentage increase in the benchmark S&P 500 index over the same period.
About the author: Jay Soloff
Jay is the Lead Option Portfolio Manager at Investors Alley. He is the editor of Floor Trader PRO Options, an investment advice that offers you professional options trading strategies. Jay was previously a professional options market maker on the CBOE floor and has been trading options for over two decades.
The charge Advancing from the debt ceiling… first appeared in stocknews.com
https://www.entrepreneur.com/finance/moving-on-from-the-debt-ceiling/453462
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