The Wall Street Believes In Large-Cap Firms
The Dow Jones Industrial Average, which contains 30 major Wall Street firms of the so-called "old economy", climbed to its fresh historical highs above 42,000 at closing price on September 19 following the U.S. Federal Reserve's jumbo 50 basis points rate cut the night before. More monetary easing is projected, even though Fed chair Jerome Powell commented that central bankers' forecasts "don't point to urgent action". Cheaper funding definitely has a positive impact on further bullish stance, yet the smaller caps' benefit theory is not borne out by the facts right now, as the Russell 2000 index behind smaller caps segment is still lagging behind, not daring to rewrite its own record book at the moment. This is seemingly going to happen sooner or later as well, yet now large components are clearly getting advantages, despite the weakest links of the Dow like sinking Boeing and wallowing Disney, added by profit taking in generally accepted anti-crisis assets like Coca-Cola, Procter & Gamble, McDonald's or Walmart, offset a speedy growth in the Dow flagmans, currently led by shining Caterpillar (+5.15% during one latest trading session), Salesforce (+5.32%) and Goldman Sachs (+4.03%).
Big marketplaces spearheaded by Amazon and consumer discretionary stocks like the Home Depot or Target may get the most out of the situation of cheaper borrowing costs, while the financial segment enjoys reducing the load on bank balances because of rising prices for their enormous bond portfolios, which is the opposite side of decreasing bond yield expectations. Deeper rate cuts would help small-cap firms in boosting income, as most of them hold floating-rate debt, yet there is another angle here, that of the lingering uncertainty over the U.S. economy's actual direction. A one-off 0.5% recalibration of the Fed's policy, with another 0.5% to 0.75% of cuts on the table before Christmas may cause ambiguous emotions in investing minds.
"Small cap earnings are still in a recession..., sales have disappointed and guidance remains below consensus," the Bank of America analysts said this week, while "weakening macro calls into question whether profits can stage the recovery investors had been expecting this year", so that the outlook for the segment looks "tough". The former American president Donald Trump described the situation more harshly in his charismatic manner by saying that a super-sized rate cut was a sign "the economy would be very bad, or they're playing politics, one or the other."
When the Fed's Powell is stating the economy is "in a good place" and the decision "is designed to keep it there", downplaying any concerns about a recession and stressing a solid yet somewhat cooling labour market, there is quite a reasonable question, on what grounds do they start the cycle of monetary easing with an untypical big rate cut. One version is that they know something rather sad that is still hidden from prying eyes, and the other idea or answer could be within the words by Kamala Harris, Trump's Democratic rival in this election campaign, when she called the Fed's rate cuts as "welcome news for Americans who have borne the brunt of high prices". If nobody can lower prices in the stores everywhere, then the Fed may reduce the borrowing costs to settle in the hope in trusting hearts. Well, the crowd of gullible people who are eager to invest more cheap money into assets is another effective tool for achieving our next target at 44,500 as minimal for the Dow Jones index, if we rely on measured distance that the market usually covers when expanding its price ranges on daily charts.
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