Fed's rate cut signal to blow? Goldman's guru recommends small stocks

Asish Shah, chief investment officer of public investments at Goldman Asset Management, suggested in an interview that investors should focus on small-cap stocks as the market widely expects the Federal Reserve to start cutting interest rates next week. Shah pointed out that as interest rates fall, small companies with a higher proportion of floating-rate loans would be the main beneficiaries of the rate cuts. However, he also reminded investors to pay attention to the quality of loans when considering investments.

Shah was cautious about small-cap stocks in the Russell 2000 index, as it includes some low-quality meme stocks. He personally preferred the Goldman Small Cap Core Equity ETF (GSC.US), a collection of high-quality companies with both growth and value potential that he believed would perform well in the next six to twelve months.

Since the beginning of the year, the Goldman Small Cap Core Equity ETF has outperformed the Russell 2000 index (up 11.5%) and the S&P 500 index (up 17%). Shah predicted that the best time for small-cap investments would come in January.

For large-cap stocks, Shah advised investors to follow the market's conventional wisdom of diversifying their portfolios. He noted that large-cap stocks had experienced significant outflows over the past one or two months, possibly due to investors overinvesting in these large-cap stocks. He warned that missing out on locking in gains and stock market returns could occur if adjustments are not made in time.

As of Thursday evening, the market expected the Federal Open Market Committee (FOMC) to cut the benchmark rate by 25 basis points from the current 5.25% to 5.5% range with more than 60% probability. This prediction sparked discussions about the possibility of a more significant cut, such as 50 basis points.

Shah also mentioned the uncertainty surrounding the November US election, which he feared could lead investors to hesitate and miss investment opportunities. He recommended that investors should actively consider small-cap stocks in order to achieve better returns in the current market environment.

Finally, Shah listed several ETFs that track small-cap stocks, including the iShares Russell 2000 Index ETF (IWM.US), the iShares S&P Small-Cap Index ETF (IJR.US), the Vanguard Small-Cap ETF (VB.US), and the DIMENSIONAL U.S.SMALL CAP ETF (DFAS.US), providing investors with diversified options.