Whatever happened to that small-cap rally?

investmentnews.com:

Okay, so maybe small-caps won’t get their day in the sun. At least not yet.

Despite all the year-end predictions that small-cap stocks would outperform in 2024, the Russell 2000 index has gained 1 percent while the S&P 500 is up 8 percent so far this year.

That relative underperformance has a lot of Wall Street analysts scratching their heads as to why small-caps have not finally taken the baton from the Magnificent 7 and the rest of the mega-caps.

Not Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, however.

“If you look at history what you learn is that small caps only outperform when we’re exiting a recession and that’s because they’re very cheap. They’ve been left for dead, and as we exit a recession, the economy accelerates,” said Hazen. “But that’s not where we are right now. We never had that recession.”

In her view, small-cap stocks have higher debt and especially floating rate debt, so they are adversely exposed to the higher-for-longer interest rates regime. Furthermore, she says small-caps have only half the earnings growth of large cap stocks this year which will also hold them back.

In other words, rumors of life in small-cap stock world have been grossly exaggerated.  

“But when the time comes it’s going to be big,” said Hazen.

Scott Bishop, managing director at Presidio Wealth Partners, has also stayed underweight small and mid-caps because their cost of capital is substantially higher, a problem that has grown even more acute with regional bank issues.  

“I have been waiting for the soft- or hard-landing recession to pivot more to small cap,” said Bishop. “At that time a few things typically happen, the Fed lowers rates and the small companies are more nimble to pivot into an