Yahoo Finance Search query
News Finance Sports More
News Today’s news US Politics World Weather Climate change Health Science 2024 election Originals Life Health Parenting Style and beauty Horoscopes Shopping Food Travel Autos Entertainment Celebrity TV Movies Music How to watch Interviews Videos Shopping Finance My portfolio Watchlists Markets News Videos Yahoo Finance Plus
Screeners Personal finance Crypto Industries Sports Fantasy NFL NBA MLB NHL College football College basketball Soccer MMA Yahoo Sports AM New on Yahoo Games Tech Selected edition
US English Select an edition
US English
US y LATAM Español Australia English Canada English Canada Français Deutschland Deutsch France Français 香港 繁中 Malaysia English New Zealand English Singapore English 台灣 繁中 UK English
Mail Sign in My Portfolio My Portfolio News Stock Market Economics Earnings Crypto Politics Biden Economy Markets Stocks: Most Actives Stocks: Gainers Stocks: Losers Calendars Trending Tickers Futures World Indices US Treasury Bonds Currencies Crypto Top ETFs Top Mutual Funds Highest Open Interest Highest Implied Volatility Stock Comparison Advanced Charts Currency Converter Sectors Basic Materials Communication Services Consumer Cyclical Consumer Defensive Energy Financial Services Healthcare Industrials Real Estate Technology Utilities Screeners Watchlists Equities ETFs Futures Index Mutual Funds Personal Finance Credit Cards Balance transfer cards Cash-back cards Rewards cards Travel cards Banking Personal Loans Student Loans Insurance Car Insurance Mortgages Taxes Videos ETF Report Options 101 Good Buy or Goodbye FA Corner Options Pit Yahoo Finance Invest EV Deep Dive … Back to classic
Read full article Yahoo Finance One of Wall Street’s favorite calls to start 2024 has flopped Josh Schafer · Reporter Fri, Apr 19, 2024, 11:00 AM 4 min read Link Copied 1 In this article:
A popular 2024 trade on Wall Street is on pause amid uncertainty over when the Federal Reserve will cut interest rates.
Many stock strategists began the year harping on a rebound in small-cap performance as consensus believed the Fed would begin reducing rates in the first half of 2024.Now, with the market scaling back its hopes for interest rate cuts this year , the small-cap Russell 2000 Index ( ^RUT ) is down nearly 3% year to date, underperforming the S&P 500’s more than 5% gain this year.
“We think the Russell 2000 could be a bit challenged in the near term until we get to kind of greater confirmation of inflation slowing and greater confirmation that, OK, the Fed is going to be able to start cutting rates,” Bank of America head of US small- and mid-cap strategy Jill Carey Hall told Yahoo Finance.
After recent conversations with investors, Hall said the main catalyst for small caps to move higher is more clarity on the Federal Reserve’s interest rate path.This reasoning remains largely unchanged from why investors liked small caps to start the year.
But investors have been given little assurance that rate cuts are coming anytime soon.Market consensus has shifted from projecting seven rate cuts this year in early January to two rate cuts this year, per Bloomberg data.The move has put a significant damper on the rally seen in small caps to close 2023, while large-cap stocks have still clung to gains this year.
Recent research from Morgan Stanley chief investment officer Mike Wilson shows that interest rate sensitivity has been far greater in small caps versus large caps amid a recent rise in Treasury yields.
“Small caps and lower quality areas of the market [have] underperformed given their greater sensitivity to a rise in rates and more levered balance sheets,” Wilson wrote on April 15.
“We maintain our large cap quality bias across both cyclicals and growth.”
A chart from Morgan Stanley chief investment officer Mike Wilson shows small cap stocks have reacted more negatively to the rise in the 10-year Treasury yield than large cap stocks.The key difference is the companies’ debt structure.Small caps have more than 40% of their debt in the form of floating-rate loans, which are exposed to current interest rates, or short-term debt that may need to be refinanced amid the higher rate environment.This compares to the roughly 75% of S&P 500 companies, which have long-term fixed debt, per Bank of America’s research team.
Add in that large cap companies often have more cash that could benefit from higher rates and that the Fed holding rates steady is simply more costly for smaller companies than larger companies.
“The [Russell 2000] index is very sensitive to credit and rates,” Hall said.”Refinancing risk is a key risk for these companies given that large caps were able to lock in a lot of long-dated fixed rate debt.
…The longer rates stay high, that becomes a bigger and bigger risk to earnings for these [smaller-cap] companies.”
Story continues The Wall Street entrance to the New York Stock Exchange (NYSE) is seen in New York City, on Nov.15, 2022.REUTERS/Brendan McDermid/File Photo (Reuters / Reuters) Signs that the economy is continuing to grow at a better-than-expected pace this year keep part of the bull case for small caps intact, Hall said, as profits are projected to rebound later this year.
Goldman Sachs Asset Management portfolio manager Greg Tuorto, who still sees opportunities in small caps, agreed with Hall.
“The underlying strength in the economy is something that always does drive small caps,” Tuorto told Yahoo Finance.”It’s a very domestic asset class.
Very much driven directly by what’s going on in the US economy.So the strength in the US economy should not be discounted in small caps.”
But shifting expectations for Fed cuts remain a headwind for the group, Tuorto said, and that’s been the bigger driver of market action recently.
Josh Schafer is a reporter for Yahoo Finance.Follow him on X @_joshschafer .
Click here for in-depth analysis of the latest stock market news and events moving stock prices .
Read the latest financial and business news from Yahoo Finance
View comments.
