Small-Cap Troubles Signal Economic Worry

Small company stocks have been hit hard this year, and “investors are beginning to wonder if that is a taste of what is to come with the wider market.” This according to a recent article in The Wall Street Journal.

The divergence in performance between small- and large-cap stocks is raising flags for some, the article reports, adding that small-caps—which derive more revenue from domestic businesses—”typically rise ahead of a wider market rally and fall ahead of a broader capitulation.”

The article cites comments from Aberdeen Standard Investments’ Timothy Skiendzielewski, investment director for the firm’s U.S. equities team: “You still have this overall flight to stability in the markets. If you’re on the fence that things might become better with the Fed becoming more accommodative, why not push more into large caps, so you have more stability?”

Contrarian investors, however, see a buying opportunity in the recent trend. Michael Russell, co-manager of the U.S. small- and midcap strategy at Hermes Investment Management, says, “If you get the Fed in an easing cycle and the economic data stabilizes, and you get better news on trade, you could see an inflection in terms of small-cap performance.”