1 New Small-Cap Buy as Momentum Remains in Charge

Premium Flagship Update

This month’s Small-Cap Momentum update starts with a simple observation. Momentum investing does not exist in a vacuum. It thrives when the market environment is aligned, when the cost of capital is reasonable, when risk appetite is alive, and when investors are not being constantly ambushed by volatility. Right now, that alignment is in place, and it matters.

We have positive market uptrends across most major indices, with leadership still coming from economically sensitive areas rather than defensive hideouts. At the same time, credit spreads remain tight and well behaved. High-yield spreads are not flashing stress, and investment-grade credit is trading as if default risk is a distant concern rather than an imminent threat. Credit spreads are the market’s early warning system, and right now that system is quiet. That silence is bullish for momentum strategies, especially in small-cap stocks where access to capital and investor confidence make a measurable difference.

Volatility completes the picture. When volatility is low and stable, trends have time to develop and compound. Momentum works because trends persist, and trends persist when investors are not being forced to de-risk every time a headline crosses the tape. Low volatility does not mean risk is gone, but it does mean the market is rewarding patience rather than panic.

The broader financial backdrop reinforces this message. The Chicago Fed National Financial Conditions Index remains solidly negative, meaning financial conditions are looser than average. In plain English, money is flowing, credit is available, and the financial system is not under strain. Historically, this kind of reading aligns with continued economic expansion and a market that is willing to reward growth and leadership. It does not eliminate risk, but it dramatically improves the odds for strategies that depend on sustained trends rather than sudden mean reversion.

Last week’s Federal Reserve rate cut fits neatly into this framework. The Fed is no longer trying to slow the economy. It is trying to manage a soft landing while keeping financial conditions from tightening prematurely. The message from policymakers is cautious but clear. More cuts are likely ahead, even if they come slowly and unevenly. For momentum investors, that matters less for the exact timing and more for the direction of travel. A central bank that is easing, rather than tightening, reduces the probability of policy-induced accidents that derail trends.

Looking ahead to 2026, the economic story has the potential to improve rather than fade. This is not just a consumption story. It is shaping up as a capital spending story. Corporate investment is being driven by reshoring, supply-chain reconfiguration, and the relentless buildout of data centers to support artificial intelligence, cloud computing, and energy-hungry digital infrastructure. Layer on tax policy changes in the so-called Big Beautiful Bill, including incentives that encourage domestic investment and faster expensing, and you have a framework that supports job creation and real economic activity rather than financial engineering.

This kind of environment tends to favor smaller, more nimble companies. Large multinationals benefit, but small and mid-cap firms often feel the impact more directly through new contracts, expanded capacity, and accelerating revenue growth. That is the fuel that sustains price momentum over multi-year periods.

There is a historical parallel worth remembering here, and it brings us to Thomas Rowe Price. Price founded his firm in 1937, in the shadow of the Great Depression, when pessimism was the default setting. He believed in owning growing businesses with durable competitive advantages and allowing earnings growth to do the heavy lifting over time. He was an early advocate of growth investing and one of the pioneers of small-cap strategies, long before they were fashionable or widely accepted.

Price understood something that remains true today. Markets reward progress. They reward companies that are expanding, reinvesting, and compounding, and they reward investors who are willing to stay with those companies as long as the fundamental and price trends remain intact. His success was not built on prediction. It was built on alignment with long-term economic forces and the discipline to let momentum work.

That is exactly the framework we are operating in today. Tight credit spreads, loose financial conditions, falling policy rates, and a coming wave of capital investment create a backdrop that historically has been fertile ground for small-cap momentum. We will stay disciplined, we will let the market tell us when trends are breaking, and we will continue to use credit and volatility as our early warning system. For now, those signals remain firmly on green, and that is a message worth respecting.

November was a constructive month for the portfolio, reinforcing the message coming from the broader market and from credit. The majority of holdings posted positive monthly returns, several by wide margins (including several double-digit monthly gains), and leadership was clearly rewarded rather than faded. This is exactly what we want to see in a momentum portfolio. Winners continued to win, laggards remained isolated rather than contagious, and there was no sign of broad internal deterioration.