Concerns Mount for Small-Cap Stocks, Signaling Potential Trouble for the Market
Small-cap stocks are experiencing volatility, raising concerns about the broader market's future. The Russell 2000, a key benchmark for small-cap stocks, has only gained 1.4% in 2023 and is down over 10% from its 52-week high. This decline has brought the index close to its 200-day moving average, indicating overall weakness and the potential for further downside, according to BTIG. In contrast, the large-cap S&P 500 and Nasdaq Composite have seen gains of 12.7% and 26% respectively. This weakness in small-cap stocks has made Wolfe Research analyst Rob Ginsberg cautious, especially considering that the Russell 2000 is now trading at its lowest levels relative to the broad market index and the tech-heavy Nasdaq since the early 2000s.
Market Outlook and Potential Declines
Despite considering buying the dip in small-cap stocks, Ginsberg believes the market could still see further declines. He suggests that there may be another 5% to 10% to go before an oversold condition develops. Additionally, concerns arise regarding small-caps' attractive valuation. Jefferies small- and mid-cap strategist Steven DeSanctis notes that despite their appealing valuations, small-cap stocks have struggled to recover. The lingering impact of the regional banking crisis earlier in the year has hindered their progress.
Favorable Sector for Small-Cap Stocks
Both Ginsberg and DeSanctis highlight the energy sector as a favorable area for small-cap stocks. Ginsberg has favored energy for months, believing it continues to perform well. DeSanctis also emphasizes cyclical names within the small-cap market and notes that these stocks have traded at attractive valuations of under 13 times earnings, outperforming secular growth names. While small-cap stocks may be cheaper than large-cap stocks, DeSanctis emphasizes the need for earnings growth to turn or become more comparable between the two segments, which he anticipates happening in 2024.
As the market landscape evolves, investors should closely monitor the performance of small-cap stocks and consider sector-specific opportunities for potential growth.
Small-Cap Stock Volatility: Implications for New Business Formation
The current volatility in small-cap stocks, as illustrated by the Russell 2000's performance, raises concerns about the broader market's future. This could potentially impact new businesses, particularly those seeking to enter the stock market. The Russell 2000's meager 1.4% gain in 2023 and its decline of over 10% from its 52-week high indicate a challenging environment for new businesses.
Market Predictions and Potential Impact on New Businesses
Despite the potential for buying the dip in small-cap stocks, analysts like Rob Ginsberg from Wolfe Research believe the market could still see further declines. This could impact new businesses, as a 5% to 10% drop before an oversold condition develops could lead to tighter lending practices and less available capital for startups. Additionally, despite attractive valuations, small-cap stocks have struggled to recover, a trend noted by Jefferies small- and mid-cap strategist Steven DeSanctis. This could further deter investors from funding new businesses.
Opportunities in the Energy Sector
Despite the overall volatility, both Ginsberg and DeSanctis see potential in the energy sector for small-cap stocks. This could present an opportunity for new businesses in the energy sector, as they might find more favorable conditions and investor interest. DeSanctis also emphasizes cyclical names within the small-cap market, which could offer additional opportunities for new businesses.
As the market continues to evolve, new businesses should closely monitor these trends. Understanding the performance of small-cap stocks and identifying sector-specific opportunities could be crucial for their growth and survival in this uncertain market environment.
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