The broader markets absorbed a gut punch Wednesday afternoon after the minutes of the most recent Federal Reserve meeting hinted that the central bank is ready to get more aggressive about tightening monetary policy.
Investors have already had weeks to digest both the Fed’s quickened pace of tapering of asset purchases and expectations for multiple rate hikes in 2022, made explicit in the post-Federal Open Market Committee meeting statement in December. But today, the release of the meeting minutes showed Fed members were starting to reach for another tool in their tool belt.
“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the minutes state, referring to the eventual sale of some of its $8.3 trillion in bond holdings.
Bob Miller, BlackRock’s head of Americas Fundamental Fixed Income, explains that the Fed has a tall task in front of it. “The combination of aggressive fiscal and monetary policy responses to the COVID crisis has resulted in an epic increase in both the money supply and in household net worth, as well as record low real interest rates,” he says.
Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, says his firm believes the Fed is likely to raise interest rates quicker and potentially shrink their balance sheet sooner than many expect, prioritizing fighting inflation over protecting against a drop in economic activity. “What is harder to forecast is to what level of market selloff they are willing to tolerate before changing course,” he says.
“We believe the Fed will endure some short-term volatility in the stock market in order to remove all of the monetary accommodation they’ve injected into markets,” Zaccarelli adds. “However, they are still likely to heed warnings of recession from the stock market (e.g. a drop of close to 20%) and would pause their activities in that event.”
Real estate (-3.3%) was the market’s worst sector on Wednesday, but technology (-3.1%), with mega-caps such as Salesforce (CRM, -8.3%) and Microsoft (MSFT, -3.8%), had a far greater impact on the major indexes.
The Nasdaq Composite plunged 3.3% to 15,100, while the S&P 500 lost 1.9% to 4,700. The Dow Jones Industrial Average fared best Wednesday, with a relatively modest 1.1% decline to 36,407.
Other news in the stock market today:
- U.S. crude oil futures settled up 1.1% at $77.85 per barrel after the Energy Information Administration reported a sixth straight weekly decline in domestic crude inventories.
- Gold futures closed higher for a second consecutive day, adding 0.6% to end at $1,825.10 an ounce.
- Bitcoin wasn’t excused from the selling, diving 4.9% to $44,012.43 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
- Rivian Automotive (RIVN) was a notable decliner, with shares of the electric vehicle (EV) maker sliding 11.2%. Sparking the selloff was news Stellantis (STLA, +0.3%) – a company formed when Fiat Chrysler and PSA Group merged in early 2021 – tapped Amazon.com (AMZN, -1.9%) to be the provider of its in-car dashboard software and cloud services. The collaboration will also allow Amazon will to be the inaugural commercial customer for STLA’s battery-electric vehicle, Ram ProMaster, which is scheduled to debut next year. RIVN announced a deal with Amazon in December, which would make Amazon Web Services its preferred cloud provider. Since hitting a record high around $150 in mid-November, Rivian stock has shed roughly 40%.
- Enphase Energy (ENPH) plunged 11.8% after BofA Securities analyst Julien Dumoulin-Smith downgraded the solar energy stock to Neutral (Hold) from Buy and slashed his price target to $187 from $297. That represented less than 5% upside based on ENPH’s Tuesday close of $178.28; shares finished Wednesday at $157.20. Shares peaked at $272 in late November, but have since slumped by more than 40%.
The 2022 Outlook for Small Caps
Small-cap stocks didn’t escape the pain either, with the Russell 2000 off 3.3% to 2,194 – rough early going for a space that the pros are nonetheless bullish on as we begin 2022.
Most outlooks for the new year typically revolve around large and mid-cap stocks, whether that’s a look at the year’s top stock opportunities, or more targeted previews focused on the market’s various sectors and industries.
But small caps shouldn’t be ignored; investors who appreciate a decent bargain should be especially focused on the long-term value potential of diminutive companies.
“While large and mid caps trade at a 35% to 40% premium to history, small caps now trade in-line with history,” writes Jill Carey Hall, equity and quant strategist at BofA Securities. “Valuations today imply high-single-digit annualized returns for small caps over the next 10 years.”
That brings us to Kiplinger’s annual glimpse into the new year’s best small-cap stocks. We’ve scoured the entire Russell 2000 in search for some of the top picks among small companies, and these 12 shine compared to their peers thanks to factors such as sterling fundamentals, attractive prices and, in a few cases, analyst expectations for triple-digit upside in just the next 12 months or so.
Kyle Woodley was long CRM as of this writing.