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Many stock strategists began the year hoping for a rebound in small-cap performance, as the consensus thought the Federal Reserve would begin cutting interest rates in the first half of 2024. Now, as the market cuts On his hopes for lower interest rates this year, the small-cap Russell 2000 Index (^RUT) is down nearly 3% year to date, underperforming the gain of more than 5 % of the S&P 500 this year.

“We think the Russell 2000 could be challenged a little bit in the near term until we get more confirmation that inflation is slowing and more confirmation that, okay, the Fed is going to be able to start to cut rates,” the Bank of America president said. of the U.S. small- and mid-cap strategy, Jill Carey Hall told Yahoo Finance.

After recent conversations with investors, Hall said the main catalyst for the small-cap rally was greater clarity on the Federal Reserve’s interest rate path.

Market consensus has shifted toward projecting two rate cuts this year, up from seven rate cuts in early January, according to Bloomberg data. The move significantly dampened the small-cap rally to close out 2023, while large-cap stocks have held on to gains this year despite the Fed’s change in rhetoric.

The main difference lies in the structure of corporate debt. Small caps have more than 40% of their debt exposed to higher rates, either in the form of floating rate loans or short-term debt that may need to be refinanced in a higher rate environment. That compares to about 75% of S&P 500 companies that have long-term, fixed-rate debt, according to Bank of America’s research team.

Add to that that large-cap companies often have more cash that could benefit from higher rates and the Fed not lowering rates simply costs small companies more than large companies.

“The index (Russell 2000) is very sensitive to credit and rates,” Hall said. “Refinancing risk is a major risk for these companies given that large caps have been able to lock in a lot of long-term debt at fixed rates…the longer rates remain high, this becomes a greater and greater risk for the profits of these companies (smaller capitalization companies.”

News Source : finance.yahoo.com
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Sara Adm

Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe. Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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