On Wednesday, October 16, the Russell 2000 and S&P SmallCap 600 indexes, which comprise small- and mid-cap stocks, hit their highest levels in nearly three years. While investors are snapping up small caps, some observers, like Michael Kantrowitz, the chief investment strategist at investment bank Piper Sandler, are yet to be convinced of a wider rotation into the segment.
Details
On Wednesday, the Russell 2000 and the S&P SmallCap 600 had their highest finishes since November 2021. Meanwhile, the Dow Jones Industrial Average closed at a record high for the third time in four sessions, as reported by Reuters. Despite a selloff in Big Tech stocks, the main Wall Street indexes finished in the black, boosted in part by gains in small caps.
In recent days, investors have been buying high-quality small caps, but Piper Sandler’s Kantrowitz, as quoted by Reuters, does not see signs of a full rotation into the segment. “I think people are broadening out their portfolio exposure [while] still sticking with the same flavor of fundamentals,” he added.
Context
A rotation out of Big Tech into other assets, including small-cap stocks, was first reported in July. Fueling the move were disappointing earnings from large companies, combined with hopes for upcoming Fed rate cuts. By early August, however, the excitement had faded as global equities sold off.
Buying has picked back up following the Fed’s September decision to cut rates by 50 basis points. In early September, Lazard Asset Management’s Antony Creighton said that small caps were at an “inflection point.” He believes that now is the right time to invest in the segment with prices “as cheap as it’s going to be.”
History suggests that small caps, on average, return a percentage point more than large caps in the six months after a Fed rate cut of 50 basis points and about three percentage points more in the 12 months following such a cut, Barron’s reported late last month, citing Jill Carey Hall, head of U.S. small- and mid-cap strategy at Bank of America.
