Smaller Might Be Better

Small cap stocks in crosshairs

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What's going on?

While the entire US stock market has tumbled around 11% since the start of October, it’s the little guys that have suffered the worst. But that could all change in 2019…

What does this mean?

Over the last ten weeks, the Russell 2000 Index – the smallest 2,000 companies listed on the US stock exchange, with a weighted average value of about $2.5 billion – has fallen around 15%.

The recent sell-off affected companies differently depending on the size of their international sales. Fast-rising US interest rates increased fears that the country’s economy could slow down too quickly: higher rates make borrowing more expensive and promote saving over spending cash. The “small-cap” US companies in the Russell 2000 generate about 80% of their sales domestically (tweet this) – and so they got hit harder than their bigger cousins, which carry out more business abroad.

Why should I care?

For markets: Smaller might now be better.

The US Federal Reserve has said it’s unlikely to raise rates much next year (although it may well do so next week), so fears of slowing US economic growth may start to recede. But after the recent arrest of an executive from Chinese telecom firm Huawei, all bets are off when it comes to the ongoing trade war. Investors worried about more tariffs affecting international commerce may turn instead to smaller companies in 2019 – although if a trade deal does get signed, that could leave the Lil Russlers unloved for longer.

The bigger picture: Live action at Stitch Fix.

Shares of small-cap US personal shopping service Stitch Fix plummeted over 20% on Tuesday after it announced fewer customers than expected – and said that the trend would continue over the holiday period, as people focused on gift-giving rather than self-spoiling. But given the fuss made over interest rates, Stitch Fix’s sticky fit could also be a symptom of slower economic growth – with consumers simply spending less.

Originally posted as part of the Finimize daily email.

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