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Betting on more fiscal stimulus, US small-cap stocks rarely outperform large-cap stocks
Author: After Xin Tong
Before the general election, the situation of the new corona pneumonia epidemic in the United States was dire, but the prices of American small-cap stocks, renewable energy companies and long-term bond yields showed a Upward trend. Inflation and higher government indebtedness.
In October, because Democratic candidate Biden has been leading the polls, the market expected the Democrats to win and launch a broader fiscal stimulus plan and raise the stakes on federal government spending. The Russell 2000 Index, which tracks US small-cap stocks, recently last October, has rarely outperformed US stocks.
However, Wall Street’s expectations of election results and their impact on the market have always been imperfect. Before the 2016 US election, the market had bet that Trump’s election would be detrimental to US stocks. However, although world stock markets fell dramatically on election night that year, investors weighed the possibility of the Republican government implementing financial deregulation and tax cuts. Since then, the global stock market has started a long-term uptrend.
At the same time, the factors complicating the market’s predictions this year are that whoever gets the majority in the Senate will also have an impact on the market, and even the gap in the number of votes between the two parties in the Senate is crucial. So, judging by multiple factors, the tracking earnings for small-cap stocks can be weak.
Largest monthly gap in four years, small-cap stocks outperformed large-cap stocks
According to Dow Jones Market Data, last October, the Russell 2000 Index rose 3.6%, while the S&P 500 Index fell 1.6% over the same period. This makes October the Russell 2000 Index from November 2016. The 2000 Index outperformed the S&P 500 Index in the largest month. The rise in the Russell 2000 index in October outpaced the Dow Jones industrial index by 7.6 percentage points, the largest gap in more than a decade.
The outstanding recent performance of the Russell 2000 Index stems from the previous market’s bet that Democratic candidate Biden will win the election, and his promised increased government spending on infrastructure and renewable energy projects will boost cyclical businesses. These companies include small businesses, banks, manufacturing companies and producers of raw materials, which often perform well in the economic recovery.
Investors also believe that higher government spending is enough to counter the ‘blue wave’ – that is, when Democrat Biden is elected president of the United States and Democrats win the majority of the Senate, the impact of corporate tax increases on the market. “Colombia Small Cap Dan Cole, co-director of the Columbia Small Cap Growth Fund, revealed that he has recently increased his stakes in companies such as Planet Fitness Inc. and the tax software company Avalara Inc.
Investors are betting on more fiscal stimulus measures, which are also reflected in the yields on public debt. Recently, the yield on long-term US bonds has increased, which means that traders are building positions for stronger economic growth and inflation expectations. Based on this, Treasury prices fell and bond yields rose.
Dow Jones market data also shows that investors’ preference for small-cap stocks is similar to that of large-cap stocks. The top small businesses that boosted the Russell 2000 Index in October were focused on distance work, learning and leisure, including homeware retailer Bed Bath & Beyond Inc., home fitness company Nautilus Inc., the manufacturer of GoPro Inc. sports cameras and storage and storage products. Container store retail group.
Small-cap stocks have long been weaker than large-cap stocks after the 2016 election
However, whether the major gains from small-cap stocks can continue is a concern for the market.
On the one hand, the expected impact of general election results on the market is often biased. Four years ago, investors also bet that the Trump administration’s plans to increase spending on infrastructure projects and relax regulations would support small-cap stocks. But in the end, as has generally been the case for the last ten years, small-cap stocks of US stocks have not gained as much as large-cap stocks for most of the past four years. Since the 2016 election, the Russell 2000 Index has risen only 31% during the same period that the S&P 500 Index has risen 55%.
On the other hand, concerns about the growing number of confirmed cases of new coronary pneumonia and the possible impact of the new round of lockdown measures on the economic outlook may also pose new threats to the trend in small-cap stocks. For example, in the last week of October, while the S&P 500 Index and the Dow Jones Index fell approximately 4.2% and 6%, respectively, the Russell 2000 Index also fell 4.2%.
Many analysts said that since any new lockdown measure will hit small business profits a bigger hit, before the new crown vaccine is successfully developed and widely used, the further surge in shares of Small cap requires new stimulus measures.
However, Jeff Buchbinder, Equity Strategist at LPL Financial, said: “The US economy does not have to completely return to normal. Investors just need to look at the relevant signals and have confidence in them to continue to support stocks. small cap “. Recently, it will be in small cap stocks. Opinion rose from a negative position in line with the market benchmarks.
Additionally, the prospects for recent fiscal stimulus plans to push small-cap stocks outperform large-cap stocks are also uncertain. Chen Dalong, a US stockbroker for the Castle Hedge Fund, said in an interview with a China Business News reporter that, including substantial assistance from the state government and federal liability protection, the huge gap between the country’s fiscal stimulus policies the two sides has not yet been closed and a new round of fiscal stimulus. Politics may have to wait until the next president takes office, so the market is concerned about the sustainability of consumer spending growth.
“Even in optimistic circumstances, that is, when the new stimulus law is passed in February next year, the distribution of real cash may not flow into the economic system until March or April, plus the impact of the epidemic on the prospects for economic recovery. Then there are limited factors that can really support small-cap stocks, “he said.
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