Small Cap Stocks: Edging Toward a Bear Market
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What is the main topic discussed in this episode?
With your money briefing, I'm J.R. Whelan at The Wall Street Journal in New York.
What recent performance trend have small-cap stocks experienced in 2018?
Investors ran to small cap stocks during most of 2018, but as of late, they've pulled back more than 15 percent. We'll explain why in a moment, along with what it could be telegraphing about the strength of the economy. First, these money and market stories you should know. U.S. consumer prices were flat in November, restrained by tumbling oil prices last month. That puts inflation at 2.2 percent, down from 2.5 percent in October and 2.9 percent in July.
How did November inflation and wage data set the economic backdrop for markets?
Now where inflation goes from here is unclear. While trade tariffs with China and rising wages are two factors that would point to higher inflation in the months ahead, some economists feel they could be washed out by a slowdown in the housing market. The benefits of steadily rising wages and a tight labor market allowing workers to quit and move to another job isn't reaching everyone. In a survey of American workers, 60 percent say they did not get a pay raise at their current job or did not get a better paying job in the last 12 months. But 91 percent of those polled say they have the same or greater confidence in the job market than they did a year ago. Now while several states and some companies have increased their minimum wage, the federal minimum wage has been $7.25 since 2009.
Studies have shown a $15 wage is the minimum amount needed to keep low-wage workers out of poverty. And pop star Enrique Iglesias and retired tennis star Anna Kournikova are putting their Miami mansion on the market for $4.85 million. They bought the property in 2015 for just under $2 million. The house is roughly 6,800 square feet, has a large combination dining and living room with a bar. It also sits on roughly a third of an acre with a swimming pool, a covered terrace, and an outdoor kitchen.
Why were small-cap stocks favored earlier in 2018 as protection against trade tensions?
They built a six-bedroom house for Kournikova's grandparents, but once the house was completed, they decided to sell because it was too big.
Earlier this year, small cap stocks were the darlings of Wall Street, with investors flocking to them. But as is the case with most categories of equities this year, things have been turned on their ear. Wall Street Journal Markets reporter Jessica Menton is here to explain why shares of smaller U.S. companies have fallen out of favor with investors.
What role could a more dovish Federal Reserve play in large-cap versus small-cap performance?
So, Jessica, small cap stocks are down about 17 percent from their August high. And investors favored them because they were seen as protection against trade tensions. But those trade-related fears, they haven't gone away.
Exactly. And we are in a rare situation where something that we saw earlier this year, we were in a correction around February and March.
Can small-cap weakness signal a broader economic slowdown like pre-2008 warnings?
And it's something that you don't tend to see small cap stocks and larger cap stocks move in tandem like this. And a lot of that's driving is because, for one, both large cap and small caps have lower earnings projections going into the new year, especially in the first quarter, because we're not going to see those tax benefits from those corporate tax rates like we did earlier in 2018. So that's why we're seeing a lot of those downgrades there. But that's something both of them are facing right now.
And small cap stocks are more sensitive also to corporate debt and borrowing.
Absolutely. And that's really the key there between the driver of larger cap stocks and smaller cap stocks. If you think about the path the Federal Reserve is on right now, raising interest rates, there are questions going into next week ahead of their meeting about whether they'll be a little bit more dovish or, say, less aggressive going into next year, which you think would...
How do rising interest rates and corporate debt make small caps more vulnerable than large caps?
potentially benefit smaller companies, but we're still in a higher rate environment and those companies hold more debt. So if borrowing costs are still going up, even if it is at a slower pace, that's going to impact them more than when it comes to larger companies. And when you look at, say, the S&P 500, and the amount of multinationals that are in the S&P 500 that have exposure overseas.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:09
2
What recent performance trend have small-cap stocks experienced in 2018?
0:09–0:39
3
How did November inflation and wage data set the economic backdrop for markets?
0:39–1:59
4
Why were small-cap stocks favored earlier in 2018 as protection against trade tensions?
1:59–2:33
5
What role could a more dovish Federal Reserve play in large-cap versus small-cap performance?
2:33–2:56
6
Can small-cap weakness signal a broader economic slowdown like pre-2008 warnings?
2:56–3:54
7
How do rising interest rates and corporate debt make small caps more vulnerable than large caps?
3:54–6:24
Speakers
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