Josh Brown on Why Small Caps and Financials Will Work with the Fed

The "Don't Fight the Fed" Playbook

• 💡 The core investment strategy discussed is to not fight the Fed, especially when market signals suggest multiple interest rate cuts are coming.
• 🎯 This approach is seen as particularly effective when the Fed is perceived to be on the side of investors, making certain sectors likely to perform well.

Small Caps and Financials as Key Sectors

• 🚀 Small caps, specifically the Russell 2000 index, are highlighted as a primary beneficiary, with potential for an all-time high close after a long consolidation period.
• 💰 Financials are also identified as a strong sector, with many major banks like JP Morgan, Mastercard, and Bank of America showing strong performance.
• 🧩 Combining small caps and financials, such as through small-cap financial stocks, is presented as a strategy that "scratches both itches."

Financial Sector Performance and Valuation

• 📈 Financial stocks, including Huntington Bank, are trading well above key moving averages with no significant resistance, yet show limited year-to-date gains and no multiple expansion.
• 📊 The financial sector is currently trading at the same PE multiple as it was in January, indicating that investors are not overpaying for these stocks.
• ✅ The strategy is considered effective even without a significant drop in the Fed funds rate, as long as the Fed's stance is supportive.

Alternative Perspectives on Financials

• ⚠️ One perspective suggests caution with banks below the "big six," preferring the big three (JP Morgan, Goldman, Morgan Stanley) due to their revenue streams from M&A and wealth management, which are less sensitive to net interest margins.
• 🏦 Another viewpoint favors the fintech space over traditional banks, citing higher upside potential and less interest rate sensitivity, with examples like SoFi offering banking-as-a-service technology.
• 💰 For specific strategies like dividend income, Columbia Banking is mentioned, but large-cap financials are noted as not fitting due to insufficient dividend or free cash flow yields for those particular investment mandates.