Small Caps Suffer as Dow Roars to Life


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.

RadarScreen® showing 1-month and year-to-date performance of select indexes.

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.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.