RE:David Driscoll on BNN todaySellthedream2 wrote: torontojay- I know you touched on this as well, interested in your opinion on the OECD deal I just seen come through with the 15% minimum global corporate tax rate. Wonder if this can be another factor in acclerating more money to small caps in the next while. The conglomerates like google/Facebook/apple will obviously be fine as a business, they have the money, but maybe some investors money trickles out because their numbers won't be as good without sheltering everything. Small caps aren't making an obscene amount of money like those guys and can put their money to grow instead of paying taxes. The big guys make so much profit there's nothing they can do, and it looks like they will keep getting targeted for more and more money.
Hi Sellthedream, I think you hit the nail right in the head. Any increase in corporate tax will further expand the PE ratio of these large cap companies. In addition to this, The divergence between large caps and small caps has never been larger than in the last 20 years. The Russell 2000 PE ratio is trading at less than 90% of the PE ratio of the Russell 1000 index. I see tremendous value in this space and at some point there will be a shift in strategies. My belief is that it will correspond to when the risk free rate returns to pre-pandemic levels in the 2-2.5% range.
I think what we're going to see is a lot of tax loss selling occurring in the small cap space. This will persist for the duration of Q4 or until Dec 29th. When the selling pressures subsides we may begin to see a glimmer of hope which will likely correspond to higher rates as well. I have observed that in the last month alone the 10 year risk free rate has climbed almost 20% which currently sits at 1.61%
Inflation is on the rise and it is only a matter of time when the interest rates will follow. The break even inflation rate currently sits at 2.5% which is approaching the highest it has ever been over the last 10 years. As this number further accelerates we will continue to see selling pressures in the bond markets as fixed income returns will be eroded due to inflation. This erosion of returns will increase the bond yields to compensate investors.
In a nutshell, I would say to continue to hold on to your small cap stocks. I believe better days are ahead and that small caps will likely outperform large caps over the next 5-10 years.