Perritt Capital Management

One of the primary duties of the Federal Reserve is to foster economic conditions that achieve price stability.

Wall Street and Main Street have gotten a divorce, or at the very least they have separated. The U.S. is in a recession but the stock market marches blindly higher.

The longest bull market in history keeps rolling along. And the recipients of this bull market’s run are losing money hand over fist. There are more than 40% of listed companies in the U.S. that lose money – the highest level since the late 1990’s outside of post-recession periods.

There is certainly a plethora of worries pestering the market: tariffs, interest rates, debt, recession, insider selling and the repo market to name a few. Many have argued that “this time is different” and all of these worries can be overcome.

The biggest threat may be the Fed and interest rates. In May, Powell said it was unlikely the Fed would cut rates. As soon as a month later, he indicated that the case for a rate cut was strengthening.

There is a herd of unicorns prancing through Wall Street and the bulk of money is chasing them. A “unicorn” refers to a startup, usually venture-backed, that achieves a private valuation in excess of $1 billion whether they are profitable or not when they become public.

The Federal Reserve has three key objectives for monetary policy: maximizing employment, stabilizing prices and moderating long- term interest rates. Regardless of what many observers may say, the Fed generally is not concerned about increased stock market volatility.

As stated in our fourth quarter 2017 commentary, we believed the tax cuts would benefit small-cap stocks. This benefit has been the case for some names following recent results, but not all companies.

The first quarter of 2018 was remarkable in several ways. We saw record highs in equity markets, but also a fierce resurgence in volatility. To some degree, the first quarter was a Jekyll and Hyde type of period. The first half of the quarter was characterized by a low volatility, momentum driven, continuation of the themes that carried 2017.

There is an old saying on Wall Street that the markets climb a “Wall of Worry.” The past quarter and year certainly had several concerns, but the markets continued higher and finished the year at all-time highs.

The small- and micro-cap markets started the third quarter with a modest correction, but finished the quarter with a monster gain in September. All equity markets produced positive results in the third quarter, but the real stars were smaller stocks.

The second quarter performance for the stock market was very much like the first quarter performance. Large stocks performed well and growth stocks outperformed value stocks. The table below details the performance for large stocks and small stocks for both the second quarter and year-to-date.

The first quarter of 2017 was an interesting quarter in that performance was a reversal of 2016 and particularly the fourth quarter of last year.

The fourth quarter and 2016 brought several surprises to investors. Fortunately, many of those surprises were positive. The first surprise came earlier last year when the British decided to exit the Euro (Brexit). While initial market reaction was negative, the proceeding weeks that followed was a strong rally for equity investors around the world.