On Wednesday, Wall Street volatility persisted, but this time it was to the downside. U.S. stocks lost money at the closing, wiping off gains from the previous two days as reported by Yahoo Finance.
Although the small-cap Russell 2000 index experienced the greatest decline—down 1.7%—it has recently outperformed the main indices. Wall Street, which is keenly focused on the effects of the strengthening US currency and rising Treasury yields, has taken notice of this performance.
These two elements most certainly contributed to Wednesday’s drop in American markets. Currency changes typically have a smaller impact on small-cap corporations than on larger-cap companies, which typically have market capitalizations of less than $2 billion. Since smaller caps are more likely to conduct business domestically than abroad, the stronger dollar is less likely to have an adverse effect on these companies.
While the so-called major averages did break through their June low, the Russell 2000 index did not, even though it experienced a severe sell-off from mid-August to early October along with the other averages.
The Russell bottomed on September 26 — marking its most recent low — two weeks before the lagging Nasdaq and two days before the Dow.
Wall Street is taking notice of the relative outperformance by small caps because, as Liz Young, head of the investment strategy at SoFi, noted in a tweet, “small-caps have beaten large-caps coming out of recessions 6 out of the last 6 times (all that we have data for).”
The fact that many equities have fallen this year is indisputable. Wall Street may argue over whether we’re in a recession. Small caps are appearing to be the better play and have the potential to drive the overall market upward until larger cap stocks cease hitting lower lows.
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Source: Yahoo Finance