{"id":8033,"date":"2019-05-21T15:57:06","date_gmt":"2019-05-21T15:57:06","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=8033"},"modified":"2022-02-26T13:07:17","modified_gmt":"2022-02-26T13:07:17","slug":"are-investors-abandoning-small-cap-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/are-investors-abandoning-small-cap-stocks\/","title":{"rendered":"Are investors abandoning small-cap stocks?"},"content":{"rendered":"\n<p>The stock\nmarket has not responded well to indications that the U.S.\u2013China trade dispute\nis falling off course. I\u2019ve written many times that Fed policy, corporate\nearnings, and the China trade deal would be three key drivers of market returns\nin 2019, and it follows that bad news on any of those three fronts is likely to\nmake the market wobbly. <\/p>\n\n\n\n<p>But as\ninvestors shed risk assets in light of new tariffs and the possibility of a\ntrade impasse, small-cap stocks have quietly been in a flattish, even slightly\nnegative trend over the past year. Without much fanfare at all, small-caps (as\nmeasured by the Russell 2000) in late March of this year were still down more\nthan -10% from all-time highs reached in August of 2018.<sup>1<\/sup> At the\nsame time, the S&amp;P 500 was just a few days away from reaching a new\nall-time high. <\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/motm_cumulative_0519-1024x506.png\" alt=\"\" class=\"wp-image-8035\"\/><\/figure>\n\n\n\n<p><strong>______________________________________________________________________________<\/strong><\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_5_19&amp;content=stock_market_outlook_report \">Should You Remove Small-Cap Exposure from Your Portfolio?<\/a><\/strong><\/p>\n\n\n\n<p>Small caps negative trend can tempt investors to try and\ntime when to favor small-caps versus mid-caps versus large-caps. In times like these, I think it is best to stick\nto hard data and a well-diversified portfolio. To help you do this, we are offering all readers a first look\ninto our just-released June 2019 Stock Market Outlook report.<br>\n&nbsp;<br>\nThis report will provide you with our forecasts\nalong with additional factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Should you keep a bullish outlook for 2019?<\/em><\/li><li><em>What about yield curve inversion?<\/em><\/li><li><em>What sectors show the best opportunity?<\/em><\/li><li><em>What industries within those sectors most merit your\n     attention?<\/em><\/li><li><em>What do we see for leading U.S. economic indicators\n     (LEIs)?<\/em><\/li><li><em>Small-cap vs. large-cap returns<\/em><\/li><li><em>And much more.<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<br> &nbsp;<br><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_5_19&amp;content=stock_market_outlook_report \"> <\/a><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_5_19&amp;content=stock_market_outlook_report \">IT&#8217;S FREE. Download the Just-Released Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2019_5_19&amp;content=stock_market_outlook_report \">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p><strong>______________________________________________________________________________<\/strong><\/p>\n\n\n\n<p><strong>So, what\u2019s been\nkeeping pressure on small-caps?<\/strong><\/p>\n\n\n\n<p>To understand the answer, one must first understand how\nsmall-caps tend to behave in general. Small-cap companies are, generally\nspeaking, domestically-based with fairly low international exposure. They\u2019re\nalso companies with higher risk\/reward characteristics, since they (again,\ngenerally speaking) have the ability to post faster growth rates than a huge,\nmultinational corporation. That being said, small-caps also tend to hold more\ndebt relative to cash and revenues, and they\u2019re highly sensitive to growth in\nthe broader economy. <\/p>\n\n\n\n<p>Readers might catch two takeaways here: <\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>If small-caps tend to be domestic companies with\nless exposure to foreign countries, wouldn\u2019t a trade war with China help boost\ndomestic sales? <\/li><li>If we\u2019re really in the late innings of this\neconomic expansion, are investors maybe pivoting to larger cap companies with\nmore stable earnings, lower debt, and more cash?<\/li><\/ol>\n\n\n\n<p>While I think both takeaways are true statements, I think\nit\u2019s the second one that matters more. And that\u2019s arguably what\u2019s holding\nsmall-caps back today. <\/p>\n\n\n\n<p>If you take a look again at the chart above, you\u2019ll notice\nthat small-caps reached a higher all-time high than the S&amp;P 500, but also\nendured a larger correction during the Q4 sell-off. In my view, such a pattern\nis totally normal, with small-caps experiencing bigger swings and higher levels\nof volatility than large-cap stocks. Par for the course. <\/p>\n\n\n\n<p>But keen observers might notice a slight shift in the\npattern, beginning in March. When we think of the broad market in Q1 and even\nthrough April, we tend to think of it in terms of the strong rally off the\nbottom. And while small-caps did experience a strong bounce in January and\nFebruary, you\u2019ll notice that from the beginning of March through today that\nsmall-caps have struggled to push higher, instead tracking sideways and even\nslightly negative. This may be a signal that investors are increasingly\ndetermined to favor larger cap companies as the economic growth picture softens\nwith time. <\/p>\n\n\n\n<p><strong>Bottom Line for Investors\n<\/strong><\/p>\n\n\n\n<p>Does this mean it\u2019s time to remove small-cap exposure from\nportfolios? I would say no. For one, small-caps could very well defy the recent\ntrend and shoot higher in the next few quarters. After all, our base case is\nstill for growth in the U.S. economy and the world, even if we expect it to be\nmodest.<\/p>\n\n\n\n<p>Secondly, for investors who have investment objectives that\nmake it suitable to own small-cap stocks, they can be a valuable piece of a\ndiversified portfolio. Since the market low in March 2009, you can see that\nsmall-caps have been just as valuable \u2013 if not more valuable \u2013 to investors\nwith a diversified approach. <\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/Screen-Shot-2019-05-16-at-10.42.34-AM-1024x466.png\" alt=\"\" class=\"wp-image-8038\"\/><\/figure>\n\n\n\n<p>&nbsp;<strong><em>Source: J.P. Morgan<sup>3<\/sup><\/em><\/strong><\/p>\n\n\n\n<p>I would argue that instead of trying to time when to favor\nsmall-caps versus mid-caps versus large-caps, building a diversified equity\nportfolio with exposure to each category can produce the desired results with\nmore control for risk. <\/p>\n\n\n\n<p>Staying\nfocused on the entire market picture is a great way to avoid this temptation of\ntrying to time when to favor small-caps. To help you stay focused these\nfundamentals and market updates, we are offering all readers a first-look into our\njust-released <strong>June 2019 Stock Market Outlook report.<\/strong><br>\n&nbsp;<br>\nThis report will provide you with our forecasts\nalong with additional factors to consider:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Should you keep a bullish outlook for 2019?<\/em><\/li><li><em>What about yield curve inversion?<\/em><\/li><li><em>What sectors show the best opportunity?<\/em><\/li><li><em>What industries within those sectors most merit your\n     attention?<\/em><\/li><li><em>What do we see for leading U.S. economic indicators\n     (LEIs)?<\/em><\/li><li><em>Small-cap vs. large-cap returns<\/em><\/li><li><em>And much more.<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!<sup>4<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The stock market has not responded well to indications that the U.S.\u2013China trade dispute is falling off course. I\u2019ve written [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-8033","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8033","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=8033"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8033\/revisions"}],"predecessor-version":[{"id":10757,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/8033\/revisions\/10757"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=8033"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=8033"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=8033"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}