Small-Cap Industrials

What Do An Aging Cycle And Rising Rates Mean For Small-Caps?

Co-CIO Francis Gannon discusses rate hikes and where we are in the current cycle.

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Small-Cap Industrials

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What’s your perspective on where we are in the cycle?

Our view of the economic cycle is really based on the bottoms-up information we’re hearing from many of the industries and companies that we meet with on a daily basis. I would tell you, you can argue from some companies’ standpoint that we’re closer to the end of the cycle, and some that we’re more mid-cycle. One of the things that is true about this economic cycle is, it has been quite long, and we have broken out of this anemic economic growth period of 2% growth that we had for a period of time, and now we’re ratcheting in terms of economic growth going forward. So I think you can argue that we’re at the middle to the end of an economic period, but I can tell you from our perspective, there is no financial crisis or large recession on the horizon at the moment.

Do you think further rate hikes could hurt small-caps?

Historically, when you see the Fed raise rates and rates start to move up, it’s actually been a good thing for small-cap companies. When you go back in time and take a look at these rising rate periods, you find that small-caps have actually done quite well in the initial phases of the Fed raising rates. We’re eight tightenings in at the moment. I still think the Fed is, for all intents and purposes still neutral to easy money. I don’t think the Fed is tight by any stretch of the imagination. I think what the Fed is doing is actually reflective of a very healthy economy. You are seeing GDP growth north of 4% in the most recent quarter; you’re seeing inflation that is healthy. So to me, it’s reflective of a healthy economy.

Article by Francis Gannon, The Royce Funds

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