The darling of Wall Street? The rotation trade and the interest rate cut expectations may bring vitality to the small-cap stock of Sichuan Minsheng Bank
Small-cap stocks are finally having their day, with the Russell 2000 index of small companies up more than 11.5 per cent in five days, its biggest gain since April 2020.
At the same time, tech and growth stocks have also seen some volatility, further confirming the view that small-cap stocks may benefit from the stock rotation that comes with the tech-led rotation of the year’s biggest winner.
The tech-heavy Nasdaq 100 index has fallen 3 per cent since last week, hitting its biggest single-day drop of the year on Wednesday.
“I think the tide has turned,” said Eric Kuby, chief investment officer at North Star Investment Management Corp, which specializes in small-cap stocks. “I hope last week’s rally was just the beginning, and small-cap stocks could have a big run for years to come.”
For months, small-cap stocks have languished while investors poured money into large-cap tech stocks that are expected to lead the index higher in most of 2024. Although the Russell 2000 index has recently surged, it is up only 10.5 per cent this year, compared with 17 per cent for the S&P 500 and nearly 18 per cent for the Nasdaq 100.
Last week, the outlook changed with lower-than-expected inflation data, strengthening the expectation that the Federal Reserve will cut interest rates in the coming months, a potential positive for small companies struggling with rising borrowing costs.
Jason Swiatek, head of small-cap equities at Jennison Associates, said that rising interest rates were a headwind for small-cap stocks. “On the other hand, as the interest rate cycle turns, that pressure will abate.”