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Op-ed: Small caps could be in for a revival. Here’s why
Stocks have endured a brutal stretch, with the Nasdaq now flirting with correction territory since reaching an all-time high on July 10. Even so, a long-awaited rotation out of tech and into small caps — a trend that kicked off a few weeks ago — could still have legs.
While all indexes have taken a beating in recent trading sessions, the Russell 2000 had shown signs of life before the so-called carry trade and worries about the U.S. economy disrupted its best run in years. A small-cap revival would unequivocally be a positive thing.
Indeed, coming after spikes in the S&P 500 and Nasdaq powered by a handful of companies perceived to benefit most from the boom in artificial intelligence, the increased market breadth may provide stocks the boost they need to overcome the recent rough patch.
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Two things need to happen for small caps to regain momentum.
The first is that the Federal Reserve will have to slash rates soon. That seems like a sure thing, with futures markets pricing in a probability of 100% of that happening in September. Notably, this level of certainty is largely responsible for sparking the rotation mentioned above in the first place.
Secondly, we’ll need to see continued economic growth. This is obviously less certain, with July’s labor market data raising some concerns. Yet, the report is not as bad as some have made it out to be. Remember, recessions typically start with layoffs, which is not what the jobs report showed. The issue was more related to demand.
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