Small-cap stocks have failed to keep pace in the market rally in 2023 and 2024, and predictions of conditions that could foster catch-up trading continue to be pushed further into the future. The Russell 2000 index has not hit an all-time high for more than 600 trading days since November 2021. According to Todd, this is the third-longest stretch on record, behind the downturn that followed the financial crisis and the bursting of the tech bubble. Sohn, exchange traded fund and sector strategist at Stratgas. .RUT 5Y The Russell 2000 hasn’t hit a new high in over two years. Even as major large-cap indexes hit record highs this year, the gap widened. And while historical and technical indicators suggest that the gap between large-cap and small-cap stocks will likely narrow eventually, that time does not appear to be imminent. “Large-cap stocks continue to outperform small-cap stocks as returns remain high. [A] A simple long-term chart of the Russell 1000 versus the Russell 2000 shows that large-cap outperformance has reached multi-decade highs and could go much further,” JC O’Hara, chief market technician at Roth MKM, wrote in a note to clients on Monday. Chad Miller, senior portfolio manager at Thrivent, said the long period of underperformance still doesn’t scare those who believe in the long-term value of small-cap stocks. “Our expectation is that this has generally been an opportunity. If you see these gaps widening and small and mid-cap stocks actually underperforming, you want to say, ‘Okay, we’re getting paid to take a little higher risk in small caps.’ … I think in the long run I would take that bet.” Miller told CNBC. Miller is one of the managers of the Thrivent Small-Mid Cap ESG ETF (TSME). But for investors who aren’t comfortable picking penny stocks to find winners, they may want to wait for macro factors to improve before waiting for a rate cut, he said. Small-cap stocks have higher interest rates. In general, small-cap stocks tend to have higher credit risk than large-cap stocks. Rising interest rates can make it prohibitively expensive for small-cap companies to take on new debt or refinance what they already have. High interest rates are a big problem, especially for smaller banks. This is because it hurts bonds and loans held as assets while also increasing deposit costs. iShares Russell 2000 ETF (IWM) The sector’s struggles surrounding the failure of Silicon Valley Bank and other regional lenders are among the factors contributing to the underperformance of small-cap stocks. Hopes for multiple interest rate cuts from the Federal Reserve this year have dimmed after recent inflation numbers showed signs of rigidity. Cayla Seder, global macro multi-asset strategist at State Street, said the entire industry could be at a standstill until rates begin to cut. This is true even if you have a strong personal name. “We really want to see areas that can deliver revenue growth, but we haven’t seen a lot of that in small-cap stocks. Perhaps if the cuts actually come through, they might become more attractive and there will actually be more demand to pick them up. But for now, interest rates Even among S&P 500 companies, earnings growth is concentrated in big tech companies, Seder said, but of course the balance sheet may be just as important. Weaker companies or banks that rely on loan growth are likely to suffer if the economy falls into a recession, but an economy with lower inflation could be a necessary combination of reasons for optimism for the companies themselves and the economy as a whole. As performance improves for all, the small-cap story may become easier, UBS Global Wealth Management said in a June preview note written by Mark Haefele and Solita Marcelli, favoring small-cap stocks over large-cap stocks due to discounts and expected improvement in small-cap returns. The S&P 600 small-cap index trades at a discount of approximately 30% to the large-cap index (on a forward price-to-earnings basis). We continue to believe that interest rate cuts should be a positive catalyst for small-cap indices. -Small-cap performance is highly correlated with large-cap performance, with greater ups and downs, and small-cap earnings growth is expected to recover throughout the year,” a UBS note said. Small-cap stocks also benefit sectors such as manufacturing, which account for a large portion of the small-cap index. Investors could benefit from a rise in the global economy, said Angelo Kourkafas, chief investment strategist at Edward Jones, who said the Institute for Supply Management’s PMI is correlated with small-cap performance. It’s been trending upward this year, briefly breaking above the key level of 50 in March, before falling back to 49.2 in April. The note said global small-cap stocks were poised for a potential breakout, outperforming their U.S. counterparts — CNBC’s Michael Bloom contributed reporting.
Historically, the slump in small-cap stocks has been prolonged.
