...Of course, some sectors are finishing better than others and no doubt profits are plowing right back into stocks, but looming in the shadows is the big bad wolf, namely, higher interest rates. From my experience higher interest rates punish stocks and reek havoc on the capital markets, and unfortunately, the stocks that suffer most are the emerging growth company stocks in the microcap markets.
We know that higher interest rates will directly affect big borrowers, but why should it affect microcaps? After all, we know that many microcaps would love to borrow even at exhorbitant rates, but nevertheless who's lending big money to microcap companies?
Not the banks that's for sure. Up until now, lower interest rates has fueled the US economy and stimulated business, including small business, and as we know money has poured into stocks, and not into fixed income. The money pool is so large that stocks are peaking just as the cash needs to be deployed, rather than sitting on the books as cash - the perfect storm is now.
MicroCaps have managed to do pretty well in 2014. I would rate 2014 as a 9 on the scale of 1 to 10. As soon as interest rates actually rise, cash will partially change direction away from equities into fixed income. I hear interest rates are going higher in the first quarter from the real estate market, and that will ultimately change investor perspective. MicroCaps will follow the market and in a downturn will be the first group hit, but if fixed income is in demand, cash will rotate out of stocks right into fixed income. Rates have been low for years and the markets have prospered. If money rotated out of fixed income into stocks, my fear is the reverse.
In summary, stocks will be negatively affected by higher interest rates and microcaps will follow stocks down, and unfortunately, could get hit the hardest.
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