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What seemed like a wildly contrarian prediction by a prominent strategist has stunningly come to fruition. While most investors anxiously track every tick in the U.S. Treasury market, U.S. small caps are leading the way among U.S. asset classes.
Richard Bernstein, former chief quantitative strategist at Merrill Lynch (and incidentally, my personal pick as the best strategist alive) penned a column in mid-May for the Financial Times:
"The projected earnings-per-share growth rate for U.S. small-cap stocks is double that for [emerging market] stocks. Based on data from Bloomberg, the projected 12-month EPS growth rate for the S&P Small Cap 600 is 34 per cent, whereas the comparable number for the MSCI Emerging Markets universe is only 17 per cent. U.S. domestic stocks currently offer better growth and are certainly under-owned."
REITs, health care, utilities and high yield debt – all defensive, interest rate sensitive investments – were the market leaders at the time the column was published. Advocating the historically volatile U.S. small cap sector looked like an all-in roulette bet or some other form of probabilistic lunacy.
Mr. Bernstein has since been proven right. The Russell 2000 small cap index is hitting new highs while the market's treating conservative, yield-based investments like the proverbial rented mule.
Readers should read Mr. Bernstein's full column to get the full rationale for the small cap call (posted on his website, no FT subscription necessary) – it has much more to do with the U.S. re-taking global economic growth leadership from the emerging markets than anything else.
Though it all makes perfect sense, I'm still nervous about advocating twitchy U.S. small caps at a time of general market volatility. Maybe that's the point, and why Mr. Bernstein is a great strategist; the wall of worry is high in this case which is why the greatest potential return is available.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .