Adam Turnquist, chief technical strategist for LPL Financial, said this week, “As inflation cools, the expectation that the Federal Reserve (Fed) will cut rates increases, therefore creating a lower cost of capital for debt-dependent companies,” The recent rise in small-cap stocks has caught the eye of many investors, pushing the Russell 2000 index to its highest point since January 2022. This upward trend, marked by a 3% increase on Tuesday, has sparked talks about a possible breakthrough for this usually underperforming market segment. Adam credits this rise to a falling U.S. consumer price index, creating a favorable environment for smaller companies that rely heavily on borrowing. As inflation cools, the Federal Reserve might cut rates, lowering capital costs for these debt-reliant firms. However, Turnquist warns that the sustainability of this rise is uncertain, especially if economic conditions worsen.
Small-cap stocks, particularly regional banks, might do well even if interest rates stay high for a long time, according to Turnquist. These businesses could adjust more effectively to such conditions. Still, he emphasizes the importance of careful stock picking within the small-cap sector. Growth stocks, which are more sensitive to economic changes, may face bigger challenges compared to value stocks. The late-stage characteristics of the current economy and expected volatility call for a cautious and targeted investment approach. Additionally, political events, such as the potential return of former President Donald Trump, could affect market dynamics. Trump’s America-first policies might boost domestically focused small and medium-sized firms, potentially benefiting the Russell 2000.
Investment strategies for small-caps are varied. Billionaire Stanley Druckenmiller’s large investment in small-cap stocks through call options on the iShares Russell 2000 ETF shows a positive outlook. Analysts also see potential gains in this ETF, which offers low expense ratios and broad diversification. Investment strategists like David Dietze recommend this ETF for its liquidity and wide coverage of nearly 2,000 stocks. Specific small-cap stocks, such as VF Corp and Organon, are also noted for their resilience and growth potential. Additionally, Jay Hatfield of InfraCap supports small-cap dividend stocks like Jefferies and Kilroy, which benefit from specific industry trends and economic conditions. These varied approaches highlight the detailed and strategic considerations needed for successful small-cap investing.
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