LIVE MARKETS-Still not the time for small caps yet
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STILL NOT THE TIME FOR SMALL CAPS YET
Fundamentals are still not supportive of U.S. small-cap equities, says Scott Wren, senior global market strategist at the Wells Fargo Investment Institute (WFII).
The S&P 500 .SPX is up 0.2% on Thursday and outpacing the small-cap Russell 2000 index .RUT, which is down 1%. That pushes the benchmark S&P 500 even further ahead in year-to-date gains.
While small caps have had some recent success, over the past two years, the S&P 500 has "significantly" outperformed the Russell 2000 index, he writes this week.
"Many financial strategists and pundits have been trying to time the resurgence of domestic small-cap stocks relative to large-cap stocks without much success over the past few years," Wren says.
"More recently, the (Russell 2000) has rallied robustly since the April lows as investors have been in a more risk-on mood and expect the Federal Reserve to cut interest rates potentially three times this year," he writes.
WFII expects the Fed to cut rates just one time this year.
Moreover, investors have gravitated to "higher-quality growth" stocks instead of smaller caps in recent years.
"Consider that small-cap equities tend to have weaker balance sheets than their larger-cap brethren. We have also found them to be more sensitive to interest rates as they typically need to rely on credit to a greater extent than larger companies," Wren says.
For the year so far, the S&P 500 is up 8.4%, while the Russell 2000 is up just 1.4%.
(Caroline Valetkevitch)
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