Trahan On Why Small Caps Have Lagged -- And Why They're Going To Take Off

Top-rated economist Francois Trahan is sounding very bullish on stocks — particularly small stocks — and the big reason is the US’s positioning relative to the rest of the world.

Trahan tells WealthTrack that while the US has in recent years addressed its structural issues, moved past the government sequester, and seen the lowering of consumer and government debt, other countries are only now facing their big problems. Slowdowns in developing areas like China have driven commodity prices down, benefiting the US, while the strengthening dollar that has resulted from the US economy’s relative strength compared to the rest of the world has been a very bullish factor, Trahan says. In fact, he says that the US budget sequestration and the Federal Reserve’s tapering of its asset-purchasing plan have been misperceived as great risks to the market, when in fact they’ve been greatly beneficial. Both helped push the dollar higher, and a rising dollar means rising P/E ratios, Trahan says. In the short term, he sees some softness in the US in the 4th quarter, a hiccup that will be the result of interest rates and oil both having risen in the middle of the year. But with both those trends having reversed, he doesn’t expect the weaker data to last long. He particularly likes small caps, because they tend to have more of a US focus then larger caps, which will be hurt by weakness overseas. He also says that the poor performance of small caps recently is in large part a result of Europe lowering interest rates, which benefited large caps because they tend to be more indebted and thus benefit more than smaller firms from rate declines. Over the long term, however, he thinks smaller stocks will benefit greatly from the global economic trends. Overall, he says that potential tightening by the Federal Reserve combined with US economic improvements that include a huge ramp-up in domestic oil production have him “incredibly bullish”. He says investors should overweight the US in their portfolios as much as they can.