After an extended period of stagnation, small-cap stocks have finally begun to show signs of life, marking their first historic week of growth in three years. Observers in the financial markets are closely analyzing this trend, and VettaFi’s Todd Rosenbluth has provided insights that highlight the potential for continued growth in this segment. On a recent episode of CNBC’s “ETF Edge,” Rosenbluth highlighted the intriguing correlation between recent electoral outcomes and the performance of smaller companies, suggesting that small caps could be on the brink of greater investor enthusiasm, particularly looking ahead towards 2025.
Interest Rates and Market Dynamics
Central to the recent upswing in small-cap performance is the trend of declining interest rates. As these rates ease, investor sentiment towards riskier assets tends to shift positively. The crucial pivot is the countertrend movement observed in small-cap stocks compared to the more sizeable, established firms that dominate the market. The Russell 2000 index, representing small-cap equities, reached its first record since November 2021, reflecting robust market movement with a notable increase of nearly 11% in November alone. In the broader context, this index has gained a remarkable 35% over the past year, revealing a significant turnaround.
This resurgence can be attributed to a combination of favorable market conditions. With rising interest rates softening, liquidity in the market is expected to improve, driving investors to diversify their portfolios beyond the high-performing mega-cap stocks. The momentum shift indicates that many investors are beginning to reconsider small caps as a viable investment strategy, especially as the economic landscape evolves.
Market Trends and the Future of Small Caps
Rosenbluth also pointed to the potential for profit taking in the so-called ‘Magnificent Seven’ — a group of large-cap tech firms like Apple and Tesla, which have shown tremendous growth and market dominance. As investors look to rebalance their portfolios and lock in profits, it creates fertile ground for smaller companies to thrive as they attract more capital. This shift in interest is not just reactive but also anticipatory, as investors reposition their assets in anticipation of future market conditions.
Another notable aspect of this transition is the movement away from money market accounts, driven by the Federal Reserve’s easing policies. The tendency to chase higher returns in equity markets can provide small-cap ETFs like the iShares Core S&P Small-Cap ETF and the VictoryShares Small Cap Free Cash Flow ETF significant advantages. These funds have experienced positive momentum as investors seek to capitalize on small-cap growth, positioning them as attractive options in the evolving financial narrative.
The cumulative effect of these trends suggests that small-cap stocks could see sustained investor interest in the coming years. As market conditions favor smaller companies, there is potential for substantial upside as investors look for diversified exposure in a period of economic adjustment. With significant gains in November and a positive outlook, it is an opportune moment for investors to consider the strategic reallocation of their assets toward small-cap stocks, positioning them to potentially capture the next wave of equity growth. The narrative for small caps is poised for a promising evolution, especially as the broader economic landscape continues to shift.