The year 2019 has seen decelerating global economic growth, depleting export levels, relaxing monetary policies and most importantly, the twists and turns in the Sino-US trade war. The probabilities of signing the Sino-US phase-one trade deal in early-January 2020 significantly boosted optimism among investors in December. 

In fact, all three major U.S. bourses are scaling new highs. The S&P 500 Index has rallied 28.6% in the year to date period. Moreover, NASDAQ composite and Dow Jones Industrial Average have surged 34.9% and 22.2%, respectively, in the same time frame. These apart, the Russell 2000 Index has gained 24.4% this year so far. The broader market uptrend should not show any signs of slowing down, at least in early 2020.

Let’s see what’s making the investment scenario for 2020 look attractive.

Fed’s Rate Cuts

After three rate reductions in 2019, the Federal Reserve put a hold on its interest rate policy on Dec 11. It also hinted at keeping interest rates intact next year unless there is any drastic change in the economic outlook. The central bank kept the benchmark interest rates within the 1.50-1.75% band.

Federal funds rate projections made in September have been lowered from 1.9%, 2.1% and 2.4% to 1.6%, 1.9% and 2.1% for 2020, 2021 and 2022, respectively. PCE inflation and real GDP estimates have been reaffirmed. Unemployment rate expectations have been lowered from 3.7%, 3.8% and 3.9% to 3.5%, 3.6% and 3.7% for 2020, 2021 and 2022.

Trade Deal Optimism

The world’s two largest economies, the United States and China, recently agreed on a phase-one trade deal. Within the trade pact, the United States has consented to lower its 15% tariff to 7.5% on about $120 billion worth of Chinese goods. The country has also suspended tariffs on roughly $160 billion of Chinese consumer goods, scheduled to be imposed on Dec 15. Moreover, China recently announced that it will trim tariffs on some imported products, starting 2020.

Beijing announced a new set of tariff exemptions on Dec 19. The waivers will be valid for a year and are expected to be enforced on Dec 26. Notably, the tariffs that have already been levied are not likely to be refunded. The latest tax exemption constitutes products like metallocene high-density polyethylene and linear low-density polyethylene. Moreover, several refined oil products comprising white oil and food-grade petroleum wax are included in the list.

Apart from the phase one U.S.-China trade agreement, the United States-Mexico-Canada (USMCA) deal grabbed investors’ attention. USMCA basically replaced the North American Free Trade Agreement or NAFTA signed in 1994. President Donald Trump was against NAFTA as he apprehended the loss of innumerable U.S. industrial jobs to low-wage Mexico. The U.S House of Representatives passed the new North American trade deal on Dec 19 in a sweeping 385-41 vote. The deal is now expected to be approved by the Senate next year.

Improving US Economy

The upbeat jobs and encouraging manufacturing updates are hinting at a wealthier economy. Per Federal Reserve’s recently-released data, the manufacturing sector, accounting for 11% of the U.S. economy, witnessed a 1.1% rise in output during November against 0.7% dip in October. Industrial output also inched up 1.1% in November versus the 0.9% slip in October.

The favorable U.S. homebuilders sentiment data for December also cheered investors. The metric hit an all-time high since June 1999. Moreover, the data on U.S. housing starts, new home sales and building permits has been encouraging.

Small-Cap Stocks: The Game Changers?

Small caps are considered the measure of domestic well-being. In a growing economy, these pint-sized securities perform supremely as these generate most revenues from the domestic market. These are less ruffled by a global economic turmoil. Moreover, per Sam Stovall, chief investment strategist at CFRA, the valuations of small-cap are indicative of higher chances of outperformance on an absolute and relative basis to the S&P 500 index. Also, lower interest rates bode well for the pint-sized stocks, perking up economic activities and resulting in higher spending, thereby boosting domestically focused companies.

While there are several options to play on the bullish trends, we presented five small-cap stocks that tend to gain more than their counterparts, given their superior methodology. All these stocks have a Zacks Rank #1 (Strong Buy), suggesting their solid growth in the coming year. 

The chart below shows year-to-date price performance of our five picks.

SP Plus Corporation (SP - Free Report) provides parking management, ground transportation, baggage, and other ancillary services to commercial, hospitality, institutional, municipal and governmental as well as aviation clients in the United States, Canada, and Puerto Rico.

The company has an expected earnings growth rate of 7.9% for 2020. The Zacks Consensus Estimate for next year has been revised 4.5% upward over the past 30 days. The stock has skyrocketed 46.4% year to date.

Ultra Clean Holdings, Inc. (UCTT - Free Report) designs, develops, prototypes, engineers, manufactures and tests production tools, modules and subsystems for the semiconductor and displays capital equipment industries, primarily in North America, Asia, and Europe. 

The company has an expected earnings growth rate of 47.4% for the next year. The Zacks Consensus Estimate for the next year has improved 28.4% over the past 60 days. The stock has rallied 182.7% year to date.

Innovative Industrial Properties, Inc. (IIPR - Free Report) is a self-advised Maryland corporation focused on acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. Innovative Industrial Properties, Inc. has chosen to be taxed as a real estate investment trust, beginning with the year ended Dec 31, 2017.

The company has an expected earnings growth rate of 80.9% for the next year. The Zacks Consensus Estimate for the next year has improved 4.8% over the past 60 days. The stock has rallied 67.5% year to date.

Cohu, Inc. (COHU - Free Report) through its subsidiaries, provides semiconductor test and inspection handlers, micro-electro-mechanical system (MEMS) test modules, test contactors, thermal sub-systems, semiconductor automated test equipment (ATE) and bare board printed circuit board (PCB) test systems for semiconductor and electronics manufacturers, and test subcontractors worldwide.

The company has an expected earnings growth rate of 681% for the next year. The Zacks Consensus Estimate for the next year has improved 5.8% over the past 60 days. The stock has rallied 38.6% year to date.

Rite Aid Corporation (RAD - Free Report) operates a chain of retail drugstores in the United States via its subsidiaries. The company operates through two segments, namely Retail Pharmacy and Pharmacy Services. 

The company has an expected earnings growth rate of 64.3% for the next year. The Zacks Consensus Estimate for the next year has improved 411.1% over the past 60 days. The stock has rallied 14% year to date.