Small- and mid-cap stocks (SMID), despite bursts of outperformance, have underperformed large-caps year to date - as they have over the past five years. But they may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps. SMID stocks can be risky, but despite those risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record. We estimate that 20% of the U.S. stock market's capitalization is comprised of SMID stocks.

Based in Los Angeles, AECOM is a global provider of planning, consulting, architectural and engineering design, and construction management services for a broad range of infrastructure projects, including transportation, water, energy, and environmental initiatives.

What the Fed Said On 9/18/24, the U.S. Federal Reserve Bank cut the fed funds rate by 50 basis points (bps). The central bank cut rates for the first time in more than four years. That last cut in 2020 occurred amid the turbulence and extraordinary circumstances of the global COVID-19 pandemic. Normally, the Fed cuts rates when growth is slowing and the economy is at risk of slipping into recession. This time, the Fed has started its rate-cutting cycle at a time when GDP is growing, companies are reporting solid earnings growth, the workforce is close to full employment, and annual wage growth is higher than annual inflation growth. A 50-Basis-Point Cut The market has its own interpretation of the Fed's pivot to accommodative monetary policy. The Fed famously has a dual mandate that seeks to maintain pricing (inflation) at a reasonable growth rate of 2%, while simultaneously promoting maximum employment. The balance of risks, investors had come to believe, had shifted away from inflation and toward concerns about the jobs economy. At 2 pm on the second day of every two-day FOMC meeting, the committee issues statement. Analysis of the 9/18/24 post-meeting comment from the Fed provides some insights into the thinking of central bank officials and the way it aligns with the market consensus. Perhaps deliberately, the first sentence of this statement seeks to provide reassurance on the health of the economy, noting that recent indicators suggest economic activity has 'continued to expand at a solid pace.' Job gains have slowed, and the unemployment rate has moved up but nonetheless remains low. Inflation continues to make 'progress' toward the Fed's 2% target but nonetheless remains elevated. The Fed has 'greater confidence' that inflation is moving sustainably toward 2% and now judges that the risks to achieving its employment and inflation are 'roughly in balance.' Given these factors, the FOMC decided to lower the target range for the fed funds rate by half a percentage point, to 4.75%-5.0%. The committee will 'carefully assess' the environment, new data, and the balance of risks when considering additional reductions in the fed funds target range. Heading into the meeting, the futures market appeared to be anticipating a 50-bps cut. The CME FedWatch Tool immediately prior to the meeting showed a greater than 67% probability of a 50-bps cut. The consensus of economists and market strategists, on the other hand, indicated expectations for a 25-bps cut. The thinking of many economists was that a 50-bps cut would send the message that the patient (the U.S. economy) needed some serious medicine; and serious medicine is only administered when the patient is really sick. Economists may have feared that sending such a dire message would undermine confidence in the economy's ability to skirt recession and in the Fed's own timing across its rate cycle. Asset markets plainly had a benign and even positive response to the Fed's half-point rate cut. That may partly be because this particular Federal Open Market Committee, under Jerome Powell, has shown itself unafraid of aggressive action when such action appeared to be needed. The Powell-led Fed in summer through fall 2022 hiked interest rates in 75-basis-point increments four straight times. Additionally, the FOMC was surprisingly uniform in its belief that 50 bps was the appropriate cut at this time. Of the 12 members of the FOMC, 11 voted for the 50-bps cut and one voted for a 25-bps cut. No one voted to hold rates steady, as the Fed had done in previous meetings dating back to July 2023. Not a 25-Basis-Point Cut Investors are still left to ponder why the Fed elected to act now, and act as it did. Yes, the most-recent monthly nonfarm payrolls report for August badly missed consensus expectations. Note, however, that benchmark payrolls revisions for the prior 12 months suggested 2.1 million jobs had been created, not the 2.9 million initially reported. That means the step-down in August was not as significant as it may have seemed. The Fed began its rate-cutting FOMC statement by pointing out that the economy was expanding at a solid pace and called the jobs economy solid. Why not wait for signs of real erosion in employment before acting? There may be another way, however, to look at the Fed's rationale for beginning to reduce rates at a time of seeming prosperity: short-term interest rates were simply too high. Recall that inflation peaked at 9.1% in June 2022. That was the highest rate since 1981. The sudden and intense onset of inflation reflected multiple factors, including the 'imported deflation' (reliance on Chinese products) during the globalization years of 2000-2015; the tariff and trade wars, which began the disruption of supply chains; and COVID-19, which contributed to the supply-chain crisis. Suppression of pricing pressures during globalization followed by global disruptions in recent years contributed to the sudden and intense onset of inflation. Once it got going, inflation climbed at a scary-fast rate, inciting fears that the Fed was well behind the curve in fighting back. The Fed's response was unequivocal, as manifested in those four consecutive 75-bps hikes (unprecedented in central bank history). Aggressive Fed policy had painful repercussions, including severely reducing activity across the housing economy, reducing vehicle sales due to high financing costs, and straining consumer balance sheets as credit-card interest rates moved higher. Along with protecting the jobs economy, the Fed may have seen a need to stimulate the twin engines of the consumer economy -- housing and automotive -- before they became any weaker. The Market Response: Positive Heading into fall 2024, investors had more on their minds than the timing and magnitude of any Fed rate cuts. Mainly, job growth was slowing more rapidly than anticipated. The stock market had rough patches, particularly mid-July through mid-August, and early September. At 2 pm on rate-cut day, the stock market surged on the 50-bps cut in the first hour. It then sold off in the final hour, perhaps on 'strong medicine must mean a sick patient' concerns. But the market took off on 9/19/24, with major indices rallying to new all-time highs as prospects for lower rates -- on mortgages, vehicle financing, floating rate debt, and other instruments -- superseded all else. At the market close on 9/20/24, the S&P 500 was up 20.8% for the year to date on a total return basis including dividends. The Nasdaq was just behind, with a return of 20.2%. In most years when the stock market is up in double digits, the Nasdaq is comfortably out in front of the broad-market index. But the biggest stocks in the S&P 500 are also the biggest stocks in the Nasdaq Composite. This includes the so-called Magnificent Seven, who in the early era of generative AI are commanding a worrisome percentage of total stock-market capitalization. With 2024 nearly three-quarters done, the odds favor slightly-above-average strength across 4Q, which historically is the strongest of the four quarters. Bearish capitulation to the bullish reality along with FOMO (fear of missing out) should partly drive any 4Q24 gains. Mainly, the market is happy that the era of high rates is ending and the days of rate cutting have begun.

When looking for potential relative strength, we note that the Russell 2000 (IWM) continues to have a very messy long-term chart -- but it's possible that a large cup-with-handle pattern is being traced out. An index break over the prior high at 235 from late 2021 would complete the pattern. As long as that breakout holds, small-caps could have a lot of room on the upside. Relative strength for the IWM versus the S&P 500 is still in a downtrend, but has flattened since late 2023. The iShares Core S&P Small Cap (IJR), which is the ETF for the S&P SmallCap 600 (SML) index, looks a bit better. We like this chart more than the IWM chart as it is less volatile and closer to making an all-time high. However, in recent years, IWM and IJR have performed in-line with each other. The iShares MSCI Emerging Market ETF (EEM) remains weak on both an absolute and relative basis. The EEM does well when the U.S. Dollar Index (USD) falls and does terribly when the greenback is rising, this as the two are highly negatively correlated. Unless the dollar really breaks down, we would not invest in EEM, which has trailed the "500" since October 2010. Most of the big moves in Bitcoin have been highly negatively correlated with the USD. After a five-wave move higher, Bitcoin looks to be tracing out a bullish flag. For Bitcoin to break to all-time highs, we likely need the USD to continue lower. The COT data for the greenback just turned bullish, which could hurt Bitcoin. For now, we would be patient and wait for a break out of the flag. And, of note, there are many other ways to play crypto. (Mark Arbeter, CMT)