NEW YORK, Jan. 31, 2024- PRISM MarketView, a leading authority in the financial markets and news sector, is pleased to present its latest insights into the evolving dynamics of financial markets. In this diverse landscape, small-cap stocks, often the unsung heroes, play a crucial role in diversifying and enhancing portfolios. These market underdogs are now stepping into the spotlight, propelled by shifting market dynamics and economic trends. Small caps are no longer just on the cusp of opportunity – they’re poised to firmly seize it.
In a recent Barron’s interview, Daniel Skubiz, senior portfolio manager at Ziegler Capital Management (ZCM), sheds light on this exciting shift. History tells us a compelling story: whenever the giants of the stock market have had their fill of glory, it’s been the small caps’ turn to shine. Remember the aftermath of the dot-com bubble? That was a golden era for small caps, launching a winning streak that lasted for years.
“We don’t think a bubble exists in large-cap technology stocks today,” Skubiz says, but after the 2000 tech wreck, “small caps went on a long run at outperformance that didn’t end until 2014.”
Why Small Caps Are Grabbing Headlines
These smaller companies are notable for generating approximately 75% of their revenue domestically in the U.S. This is significant, especially with increased government investment in infrastructure. Compared to large-cap companies with international exposure, small caps can provide some insulation against international disturbances and currency market fluctuations.
Regarding private equity investments, which have gained attention recently, small caps present a different proposition. They offer transparent, market-based valuations and the ability to adapt swiftly, unlike the often complex and long-term capital commitments seen in private equity.
“There’s more money chasing fewer opportunities,” Skubiz noted. “You’re getting a riskier environment for private equity because there aren’t as many high-quality opportunities. At the same time, valuations of private companies aren’t marked-to-market, as public companies are, so they’re worth what someone says they’re worth. Another risk to investing in private markets is the inability to get out of a position quickly—most funds require investors to lock up their capital for five years or more.”
The Advantage of Small Caps in a Changing Economic Landscape
According to Tom Lee of Fundstrat Global Advisors, fund flows into the stock market are crucial for small caps to outperform. If retail funds aren’t pouring into the stock market, they’re likely not reaching small caps either. However, this could shift in 2024 as investors begin to gravitate back towards the stock market. Lee anticipates that “inflows will inflect positive for the full year in 2024,” boosting small cap stock prices.
Small cap stocks are often highly leveraged and tend to have a higher cost of capital. Therefore, a decline in interest rates, which is a distinct possibility, should disproportionately benefit small caps over their large-cap counterparts. This financial leverage makes small caps particularly sensitive to changes in the economic environment, positioning them for significant gains in favorable conditions.
Looking Ahead: A Bright Future for Small Caps
In the world of small caps, there’s a sense of anticipation for 2024. While traditionally more volatile than large caps, small caps have shown potential for notable returns.
The iShares Russell 2000 ETF (IWM) is a popular choice for those looking to engage with small caps, offering a balanced approach in terms of cost and assets. Looking forward, small caps are not merely a passing trend but an emerging force in the market, with unique strengths and the potential to yield impressive returns, potentially outperforming larger counterparts for the first time in years.
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PRISM MarketView does not provide investment advice.
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