Small-Cap Stocks: Investor Concerns
Investors are closely monitoring the Federal Reserve’s monetary policy as the central bank decided to hold interest rates steady for the second consecutive time during its recent meeting. While many investors believe the Fed is done raising rates, concerns about the US economy’s health continue to linger, particularly in the small-cap stock segment. The Russell 2000 index, which tracks the performance of US small-cap stocks, has experienced a decline, touching its lowest level since November 2020 after turning negative for the year in October. Small-cap stocks are down 5% for the year, underperforming the benchmark S&P 500 index’s 10% gain.
Small-cap stocks initially rose during the spring, contributing to the market’s rally. This surge expanded the market’s scope beyond the Big Tech giants and raised optimism about the durability of the bull market. Many small-cap stocks are in the financial sector, and their performance is seen as crucial for a sustained market rally. Strong banks are considered a sign of a strong economy and stock market.
However, the stock rally began to wane in the summer and has struggled to regain momentum. Factors such as the Israel-Hamas conflict, surging bond yields, and worries about the economy’s health have contributed to this decline.
Investors are cautious about the economic outlook as they contend with elevated interest rates and geopolitical conflicts. While the labor market and the broader economy have remained resilient amid the Fed’s inflation-fighting measures, some economists and investors believe that the full impact of the central bank’s monetary policy tightening has yet to be felt.
Small-cap stocks are considered an economic strength indicator as they generate most of their revenue domestically. They are also more sensitive to rising interest rates, making it more challenging to access capital and increasing costs for items such as labor. Concerns are that difficult economic conditions for smaller companies could eventually affect larger companies.
Despite these challenges, some believe that small-cap stocks could rally, especially if the economy experiences renewed growth in the coming year. Historical data shows that small-cap stocks tend to perform well following broader market downturns.
While the path forward for small-cap stocks remains uncertain, opportunities may arise in sectors like energy and financials. Some investors see potential in beaten-down stocks within these sectors.
The Federal Reserve’s decision to hold interest rates steady for the second consecutive meeting reflects the central bank’s assessment of the economic landscape. Economists and financial markets had anticipated this pause in the Fed’s rate-hiking campaign, with several Fed officials suggesting a slowdown in the US economy as it adapts to higher borrowing costs.
Despite aggressive rate hikes aimed at combatting inflation, the US economy has not only avoided a recession but has continued to expand, largely due to robust consumer spending.
In a separate development, turkey prices have dropped, making Thanksgiving preparations more budget-friendly for families. The decline in turkey prices, particularly the star of the holiday dinner, will likely encourage more families to celebrate Thanksgiving at home.
Retail prices for 10- to 15-pound turkeys have decreased by 13% in October compared to the previous year, according to Wells Fargo. The wholesale price for turkey has seen an even more significant 29% slump in October compared to the previous year. This price drop will ease the cost of cooking the Thanksgiving meal, benefiting families on a tight budget.
