Advertisement

American small-cap stocks will bounce back

Smaller companies in America will play catch up with their bigger peers.

The US stockmarket as a whole is expensive compared to its history. However, anyone looking to invest in America might want to look at the smaller company index the Russell 2000.

While the S&P 500 blue-chip index is up by around 8% this year, the Russell is little changed. But there's scope for small-cap stocks to play catch up.

Advertisement - Article continues below

Small businesses are at their most optimistic in seven years, with confidence nearing its pre-recession average. That makes sense because small caps are domestically orientated, they benefit most from household spending, which accounts for the lion's share of America's GDP.

And for now at least, the US consumer is in fine fettle. Consumer confidence is also at a seven-year high now that the labour market is rapidly gaining strength. There is talk of this being the best Christmas shopping season since the crisis.

As a result, "we don't expect the divergence between the economic performance of small firms and the small-cap equity market to last long", says Capital Economics.

Another boost for small caps is that they are barely exposed to currency risk, whereas the strengthening dollar undermines the S&P's foreign sales worth around half of total revenues.

A further reason to like small-cap stocks is that their earnings quality is higher, notes Barclays. Since the recovery began, large caps have beefed up their earnings mainly by managing costs smaller companies have focused on bolstering sales.

The Russell 2000 should also benefit from cash-rich blue chips looking to scoop up smaller rivals. Given all this, the Russell seems set to close the gap with its blue-chip rival over the next few months.

Advertisement
Advertisement

Recommended

Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
The Fed will print whatever it takes – what does that mean for markets?
US Economy

The Fed will print whatever it takes – what does that mean for markets?

Jerome Powell, chair of the US Federal Reserve, has vowed to keep pumping money into the economy for as long as it takes to get America back on its fe…
11 Jun 2020
What Friday's stonking US jobs report means for markets
US Economy

What Friday's stonking US jobs report means for markets

At the end of last week, US employment figures gave everyone a pleasant surprise and sparked hopes of a “V-shaped” recovery. John Stepek explains how …
8 Jun 2020
Trump urges the US Federal Reserve to bring in negative interest rates
US Economy

Trump urges the US Federal Reserve to bring in negative interest rates

Donald Trump has urged the Federal Reserve to embrace negative interest rates.
21 May 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Three ideas for Lloyds Bank's new boss
UK stockmarkets

Three ideas for Lloyds Bank's new boss

The Black Horse needs whipping into shape. A change at the top provides a great opportunity, says Matthew Lynn.
12 Jul 2020
What gold, bonds and tech stocks have in common
Stockmarkets

What gold, bonds and tech stocks have in common

"Risk off" or "safe haven" assets such as gold and government bonds have been doing well lately. But so have riskier tech stocks. That seems to defy c…
10 Jul 2020