Though by no means foolproof, troughs in the Conference Board’s Leading Economic Index (LEI) — a composite index of economic and market variables that in aggregate purports to anticipate potential turning points in the business cycle — historically have augured well for the performance of small-cap stocks relative to large caps. Recent LEI data suggest the metric may be bottoming out after a long period of decline, at least partly due to some inflation-friendly data.
Last year’s volatility provided opportunities to acquire fundamentally solid US companies at valuations we believe were distorted by cyclical forces. There are reasons to think that these actions may be rewarded in 2024, especially if slowing economic activity and cooling inflation prompt the US Federal Reserve to cut its policy rate, as bond futures markets expect.
Easier monetary conditions may bolster investor risk appetites, provide small companies with greater operational and financial flexibility, and jumpstart M&A activity among private equity sponsors eager to deploy their massive stores of dry powder.
