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The higher-for-longer rate path outlined by the Federal Reserve this past week could mean a delayed recovery for small caps and international stocks. But that doesn’t mean investors should stay away from these assets, one strategist says. Small cap and international stocks are sorely lagging this year. While the S & P 500 remains higher on the year by more than 12%, the S & P Small Cap 600 is down 1%. And, the iShares Core MSCI International Developed Markets ETF (IDEV) has added more than 5% over the same time period. Still, CFRA chief investment strategist Sam Stovall expects the uncertainty around future monetary policy from the Fed — which on Wednesday projected one more hike for the remainder of this year, and fewer rate cuts in 2024 — could mean a further pullback in equities. “It also probably means that the mid- and small-cap stocks, which are currently trading at very attractive relative PE discounts, that it might take longer for them to become leaders once again,” said Stovall. Even so, the strategist said these assets are worth investor consideration. Not only are they trading at attractive valuations, they could be in for a sharp recovery once the Fed decides to start cutting rates. CALF YTD mountain CALF YTD For wary investors, Stovall highlighted favorites he personally owns: the Pacer Global Cash Cows Dividend ETF (GCOW), which tracks large-cap stocks in developed markets, and the Pacer U.S. Small Cap Cash Cows 100 ETF (CALF) , which tracks 100 companies in the S & P Small Cap 600 Index based on free cash flow yield. GCOW is up by more than 8% this year, while CALF is higher by 15%. These exchange traded funds pinpoint stocks that are cash cows — generating stable cash flows with relatively low risk — making them reliable holdings in challenging times. “Should we see a turnaround in small and international stocks, then these would likely benefit, but also hold up better if that recovery is delayed,” Stovall said. He added, “In a sense you’re holding the bluest of blue-chip stocks on a global basis, or the strongest of small cap stocks.”
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