Small-Cap Stocks Wobbling, Signaling Trouble for the Market
A small-cap stock is a public company with a total market value of about $250 million to $2 billion. Recently, small-cap stocks have been showing signs of instability, which could indicate potential problems for the broader market. The Russell 2000, a small-cap index, has experienced minimal growth of just 1.4% in 2023 and has declined over 10% from its 52-week high. This decline has brought the benchmark close to its 200-day moving average, suggesting overall weakness and a possible downside break, according to BTIG.
The Comparison with Large-Cap Stocks
In comparison to the S&P 500 and Nasdaq Composite, two popular large-cap stock indices, the Russell 2000 has displayed weaker performance. Over the same period, the S&P 500 has observed a 12.7% increase, while the Nasdaq Composite has surged ahead with a growth of 26%. This underperformance by small-cap stocks has sparked concerns among financial experts. One such expert is Rob Ginsberg, an analyst at Wolfe Research who had previously been optimistic about the market’s prospects in 2023.
Rob Ginsberg’s Perspective
According to Ginsberg’s analysis, the current trading levels of the Russell 2000 index are at their lowest point since the period between 2000 and 2003. Ginsberg highlights a concerning trend that healthy bull markets typically have a diverse group of participants leading the way, yet small-cap stocks are not keeping up. As such, he predicts a significant decline in the value of small-cap stocks relative to the rest of the market within the next two to three months.
Expectations for Small Caps
According to Ginsberg’s analysis, although he is hopeful of purchasing small caps during a market dip, he foresees additional declines in the market. He predicts that there could potentially be a further decrease of 5% to 10% before a condition of oversold is reached.
Concerns About Small-Cap Valuations
Despite being attractively valued, small-cap stocks are struggling to recover, according to Steven DeSanctis, the small- and mid-cap strategist at Jefferies. DeSanctis has expressed his concern over the inability of small-caps to overcome the headwinds caused by the regional banking crisis that occurred earlier this year. Even though the current valuations are at levels not seen since February 2002, small-cap stocks are finding it challenging to regain their footing.
Preferred Sector for Small Caps
According to both Ginsberg and DeSanctis, small-cap stocks in the energy sector provide excellent investment opportunities. Ginsberg, who has been favoring the energy sector for months, believes that it will continue to perform well. DeSanctis, on the other hand, highlights the cyclical names within the energy sector and recommends small-cap stocks in the cyclical market, which trade at under 13 times earnings, as a better option than secular growth names.
Despite the challenges faced by small-cap stocks, the experts believe that there is still potential for growth. However, they caution that sustained success in the small-cap market requires earnings growth and a more comparable performance between small and large caps.
