Shifts in sentiment seem to be hurting small-cap stocks, one of the market’s strongest areas this year.
The Russell 2000 small cap ETF (IWM) is the only major index with a negative return in the last month. That marks a big change versus its performance over the longer six-month or year-to-date periods.
A couple of factors seems to be at play. First, cooling trade wars between the U.S. and China are bringing investors back to global blue-chips like Boeing (BA) and Caterpillar (CAT). That’s provided a boost to the mega-cap-focused Dow Jones Industrial Average.
Second, small caps trade at an average price-to-earnings ratio of 59. That’s more than twice the 23-25 multiple of bigger-company indexes like the Dow, Nasdaq-100 or S&P 500. Sure, there are times when investors are willing to tolerate that kind of premium, but right now doesn’t seem to be that time — especially when you consider interest rates are rising.
Then you have currencies. Small caps often follow the U.S. dollar because they’re more exposed to the domestic economy. That was a blessing when the greenback was rallying and traders fretted about global risk. But now, just the opposite seems to be unfolding.
In conclusion, this isn’t a trade recommendation and everyone needs to do their own homework. But shifts of sentiment in the market seem to be turning against small caps for the time being.