Displaying items by tag: small caps
Investors are increasingly betting on a blue wave. More interestingly, the market’s calculus for what that blue wave to could mean to stock prices and the economy is changing. For much of this election cycle, a sweep by the Democrats was seen as a negative for the economy versus the status quo. However, in recent weeks investors have been shifting the other way—seeing a blue wave as a win for the economy. The reason why has to do with infrastructure spending and bigger and longer-term stimulus packages. While the possibility for this has been hurting Treasury prices because of the likely increased debt load, it also means that both infrastructure stocks and small caps seem poised to gain as we approach the election and well after it.
FINSUM: Small caps have just recently started to outperform their large cap cousins, a sign of the shift in perspective. Infrastructure stocks seem a good bet because no matter who wins the election there will probably be some deal on that front.
Small cap prices usually expand and contract more quickly than large caps do. This happens both in downturns and upswings. However, in this coronavirus rally, that has not held up, as small caps are faltering while their larger peers soar. For instance, the Russell 2000 is trailing the Russell 1000 so far this year. “This latest rally is very much a capitalization story — the big players were the ones that held their own”, says SEI investments. Another portfolio manager added “The secular growth force that comes from mega-cap tech stocks doesn’t appear to be replicable in the rest of the market”.
FINSUM: Small caps tend to lack the scale that would allow them to thrive even as the economy falls, which means there haven’t been as many winners as there were in large caps.
All the market focus has been on the Dow, but small caps beat the bigger index into a bear market. Even before the big falls of the last few days, the Russell was down 25%. Small companies account for about half of US economic activity and tend to feel the strongest effects when the economy falls, explaining the sharp decline. However, small caps also tend to outperform in the three months after such falls, as they also disproportionately benefit from an economic recovery.
FINSUM: Small caps were trading at all time highs right before this plunge, and as this situation begins to clear, it seems like a very good buying opportunity.
If you think the economy is going to keep humming along, then buy small caps, as they look set to gain the most from that scenario, at least according to Leuthold group. Small caps look likely to benefit disproportionately from the rising inflation and higher appetite for risky assets that accompany a strong economy. That said, small caps have lagged large caps for the last decade, so there is some reason to be skeptical about this call. Accordingly, “If 2020 should prove difficult for earnings growth, we would expect large-caps to maintain their earnings growth superiority”.
FINSUM: We can see the economy continuing to roll, but we have a harder time seeing inflation jumping up. We think the status quo will continue.
Small cap stocks are starting to have their day in the sun. The Russell 200 has started to catch up to large cap indexes this autumn, and some stocks look ready to surge. The index is now up 21.2% for the year, just a few points behind the S&P 500’s 25.5%. According to Merrill Lynch, economic recoveries “tend to be the best phase for small-caps …That’s one key reason we think we could be poised for a shift from large to small”. According to a Jefferies analyst, “I think small is primed to outperform as the economy and earnings improve in 2020 … That’s going to be the whole ballgame”.
FINSUM: It is hard to imagine the US is going to enter an “economic recovery phase” at the end of a ten-year bull run, but the market’s perception of the current economy is exactly that, so these forecasts might be spot on.