Source: Wall Street News
As uncertainty about the Fed's interest rate cut rises, the boom in trading around small-cap stocks is fading.
At the beginning of this year, in anticipation of rising interest rate cuts, many Wall Street stock strategists were optimistic about the rebound in small-cap stocks. However, as strong economic data successively dampened expectations of interest rate cuts, small-cap stocks$Russell 2000 Index (.RUT.US)$The performance has disappointed investors' expectations.
Currently, market consensus has changed from seven interest rate cuts this year predicted in early January to two. The Russell 2000 Index ended a strong rebound at the end of last year. The cumulative decline since this year has been more than 3%, far lower than$S&P 500 Index (.SPX.US)$A cumulative increase of more than 5%.
At the end of 2023, the Russell 2000 Index once soared to a 16-month high. The cumulative increase for the whole year reached 15.1%, surpassing the Dow's 13.7% increase.
Jill Carey Hall, head of the Bank of America's small and medium cap strategy, said in an interview with the media that the main catalyst for the rise in small-cap stocks was the Federal Reserve's clear interest rate path, and now this catalyst has disappeared:
“We believe the Russell 2000 Index may face some challenges in the short term until we further confirm that inflation is slowing down and the Federal Reserve can start cutting interest rates.”
Morgan Stanley Chief Investment Officer Mike Wilson's latest research report also pointed out that small-cap stocks are far more sensitive to interest rates than large-cap stocks, and the recent continued rise in US bond yields has particularly impacted small-cap stocks. Wilson stated:
“Small-cap stocks and low-quality stocks are underperforming because they are more sensitive to rising interest rates and leveraged balance sheets.”
“We maintain our preference for cyclical stocks and growth stocks.”
Some analysts point out that the key difference between small-cap stocks and large-cap stocks is the company's debt structure. Generally speaking, more than 40% of the debt of small-cap stocks is a variable rate loan or short-term debt, while about 75% of the debt of S&P 500 companies is long-term fixed debt.
As a result, Hall said interest rates remained high, and the refinancing risk and profit risk of small-cap companies was also increasing.
However, there are still analysts who are optimistic about small-cap stocks. Goldman Sachs Asset Management portfolio manager Greg Tuorto said that US economic fundamentals will continue to drive small-cap stocks:
“Small-cap stocks are a very native asset class, directly driven by the state of the US economy. Therefore, the impact of the strength of the US economy on small-cap stocks should not be underestimated.”
Tuorto also acknowledged that the weakening of interest rate cut expectations is still a challenge for small-cap stocks, but once expectations are boosted, it will once again drive the stock up.
Editor/jayden