After a prolonged calm period, volatility roared back into the market with the sharp rise in Treasury yields, which led to the bloodbath in the stock market this week. This pushed the major indices into the red territory for the year and in the correction zone from the latest peak.
The initial nervousness came last Friday, when January jobs reports showed the fastest pace of wage growth in more than eight years. This has triggered fears of inflation that might force the Fed to adopt speedy rate hikes. Notably, higher-than-expected rates will lead to a rise in borrowing costs that might dampen the attractiveness for the riskier assets. Apart from these, Washington turmoil, geopolitical tension and lofty valuations are weighing on the stocks.
However, the bullish sentiment for U.S. stocks remains intact given accelerating global economic growth, euphoria surrounding the new tax legislation and strong corporate earnings. The massive $1.5-trillion tax cuts will create an economic surge, boosting job growth and earnings of corporates. It will further result in reflation trade. Additionally, growth in the U.S. economy has been solid, buoyed by an impressive labor market, higher wages, increasing consumer spending and high consumer confidence.
In such a scenario, investors seeking to capitalize on the strong fundamentals, but worried about uncertainty, should consider mid-cap stocks in the basket form.
Why Mid Caps?
While large companies are normally known for stability and the smaller ones for growth, mid caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. These middle-of-road securities are arguably safer and have the potential to move higher in turbulent times, especially if political issues or financial instability creeps into the picture.
Further, honing in on growth securities in this capitalization level allows investors to earn more returns. This is because growth stocks refer to those high-quality stocks that are likely to witness revenues and earnings increase at a faster rate than the industry average. These stocks harness their momentum in earnings to create a positive bias in the market, resulting in rocketing share prices.
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