Fall in small-caps shows Wall St still chary of US economy

Small-Caps Hold Key To Sustained Rally

• Russell-2000 index is down 5% this year
• It’s underperforming S&P 500 index’s 10% gain
• Small-cap stocks rose during the spring
• It helped broaden the market’s rally beyond just Big Tech heavyweights
• A bulk of small-caps are financial stocks
• Small-cap stocks’ recovery key for a sustained rally

New York: Declines in small-cap stocks suggest that worries about the US economy’s health still linger on Wall Street, media reports said. The Russell-2000 index, which tracks the performance of US small-cap stocks, last Friday touched its lowest level since November 2020 after turning negative for the year earlier in October. The index is down 5 per cent for the year, underperforming the benchmark S&P 500 index’s 10 per cent gain, CNN reported.

Small-cap stocks rose during the spring, helping broaden the market’s rally beyond just Big Tech heavyweights and raising hopes among investors that the then-burgeoning bull market had staying power. A bulk of small-caps are financial stocks, whose recovery some view as key for a sustained rally. Strong banks uphold a strong economy and stock market, the wisdom goes.

But the stock rally fizzled out mid-summer, and has struggled to find footing since. The Israel-Hamas war led investors to seek out havens like gold, while surging bond yields have made holding cash the most attractive it’s looked in years, CNN reported.

That decline reflects pessimism about the economy’s health, as investors grapple with elevated interest rates and geopolitical strife, says Jim Polk, head of equity investments at Homestead Funds. While the labor market and broader economy have stayed remarkably resilient since the Fed began its aggressive inflation-fighting campaign, some economists and investors warn that the economy has yet to feel the brunt of the central bank’s monetary policy tightening, which has brought the benchmark lending rate to its highest level in more than 22 years.

Small-cap stocks tend to be an indicator of economic strength, because they generate most of their revenue domestically. Smaller companies are also more sensitive to rising interest rates, which make it harder to access capital, and rising costs for line items like labor. The concern is that as tough economic conditions eat away at smaller companies’ balance sheets, they will eventually catch up to larger companies, CNN reported.