The Federal Reserve’s recent announcement regarding a higher-for-longer rate path has raised concerns about the recovery of small cap and international stocks. While these assets have been underperforming this year, one strategist believes that they are still worth considering despite the potential for a delayed comeback.
While the S&P 500 has experienced a gain of over 12% this year, the S&P Small Cap 600 has declined by 1%. Similarly, the iShares Core MSCI International Developed Markets ETF (IDEV) has only added a modest 5% during the same period. This discrepancy indicates that small cap and international stocks have been lagging behind and struggling to gain traction.
The Federal Reserve’s announcement of one more rate hike for this year and fewer rate cuts in 2024 has introduced uncertainty into the market. This uncertainty could potentially lead to further pullbacks in equities, including small cap and international stocks. The chief investment strategist at CFRA, Sam Stovall, believes that this uncertainty may extend the period in which these stocks become leaders once again.
Despite the cautious outlook, Stovall emphasizes that small cap and international stocks still offer attractive valuations. The current relative price-to-earnings (PE) discounts make these assets appealing for investors. Additionally, once the Federal Reserve decides to cut rates, these stocks could experience a sharp recovery.
Stovall personally owns two exchange-traded funds (ETFs) that he believes are worth considering: the Pacer Global Cash Cows Dividend ETF (GCOW) and the Pacer U.S. Small Cap Cash Cows 100 ETF (CALF). GCOW tracks large-cap stocks in developed markets and has gained over 8% this year. CALF tracks 100 companies in the S&P Small Cap 600 Index based on free cash flow yield and has seen a 15% increase. These ETFs focus on stocks that are considered cash cows, generating stable cash flows with relatively low risk. These qualities make them reliable holdings, especially during challenging times.
Stovall believes that if there is a turnaround in small cap and international stocks, both GCOW and CALF would likely benefit. Additionally, these ETFs are expected to hold up better in case the recovery is delayed. The focus on cash flow and stability makes them resilient investments.
While the Federal Reserve’s rate path may present challenges for small cap and international stocks, there are still reasons to consider investing in these assets. The attractive valuations and the potential for a sharp recovery once rates start to decrease make them appealing options. By diversifying one’s portfolio with ETFs like GCOW and CALF, investors can position themselves to benefit from a potential turnaround while minimizing risk in challenging market conditions.
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