Many equity strategists had been hoping for a turnaround in small-cap stocks since the beginning of the year, given the consensus that the U.S. Federal Reserve would start cutting interest rates in the first half of 2024. Currently, the small-cap Russell 2000 Index (^RUT) is down nearly 3% year-to-date as the market retreats from expectations for interest rate cuts this year, compared to the S&P 500 Index's more than 5% gain this year. is below.
“We think the Russell 2000 could be a bit of a challenge in the near term until we get certainty that inflation is slowing and the Fed can start cutting rates,'' Bank of America's head said. ” he said. Jill Carey Hall talks to Yahoo Finance about her U.S. mid- and small-cap strategy.
After a recent conversation with investors, Hall said the main catalyst for small-cap stocks rallying is more clarity on the Federal Reserve's interest rate path.
The market consensus has shifted to expecting two rate cuts this year, up from seven cuts in early January, according to Bloomberg data. The move puts a big brake on small-cap stocks heading into the end of 2023, while large-cap stocks have continued to rise this year despite the Fed's change in perspective.
The main difference is the debt structure of the companies. Small-cap stocks have more than 40% of their debt exposed to high interest rates in the form of floating-rate loans and short-term debt, which may need to be refinanced in a high-interest rate environment. That compares with about 75% of S&P 500 companies with long-term fixed-rate debt, according to Bank of America's research team.
It also adds that large companies often hold more cash, which could benefit from higher interest rates, and that the Fed's failure to cut interest rates simply costs smaller companies more than large companies. please.
” [Russell 2000] “The index is very sensitive to credit and interest rates,” Hall said, adding, “Given that large-cap stocks have been able to lock in a lot of long-term fixed-rate debt, refinancing risk is a significant risk for these companies… The longer interest rates remain high, the greater the risk to these companies' earnings. [smaller cap] companies. ”
