Trickle Charge

A battery left unattended will deplete its charge unless it is attached to a device known as a trickle charger. Providing a small amount of energy can prevent it from dying. It can spring back to life when called upon and give a much-needed boost.

The U.S. AI boom has drawn investor attention to megacaps, promising substantial capital expenditures for the development of massive LLM data centers. However, all that spending benefits the economy as a whole, as these dollars flow through to the many small businesses. The spending trickles down, bolstering the activity of many smaller firms that supply these capital programs.

The Fed's rate cut, widely telegraphed though it may be, will add fuel to this fire by providing interest rate relief to many overextended small companies that have been shunned by investors so far. Poor balance sheets have plagued small firms as they have struggled through the COVID-19 era and tariff tantrum.

Small-cap stocks can now be included in investor portfolios after years in the wilderness. The underperformance is substantial enough to have created a valuation advantage that investors should capitalize on.

Small-cap ETF vs S&P 500 ETF

We can add small stocks to quality defensives and deep cyclicals to our portfolio to benefit from the rate-cutting cycle that should bolster economic expansion into 2026.

Unlike the Reagan-era experience, the trickle-down theory of economics should actually work this time.

Risk Model: 1/5 - Risk Off

Only the 3-month implied volatility element supports incremental risk-taking in this scenario. The two price-based measures of the model, RSI and 200 DMA, are decidedly stretched. And AAII bulls have dropped sharply as this uninterrupted rise in the markets has spooked investors who are bombarded with scary headlines daily. That being said, overbought markets are a hallmark of past monetary easing cycles in their earliest stages. They often don't allow for second chances, and the FOMO effect is what results. Hence, the self-sustaining nature of the current melt-up we are experiencing.

The sentiment backdrop can change quickly in such a super-heated geopolitical world, so some caution is warranted. The Midterms, the budget battle and the Supreme Court tariff ruling loom large as potential risk-off drivers. I'm hoping for a sell-the-news event this week, but it depends on Powell's body language as to whether there will be further cuts. However, as we all know, hope is not a strategy.