Small-cap stocks are experiencing their highest volatility in almost a year. After lackluster performance in 2023, many had hoped for a strong showing this year. But uncertainty from the Federal Reserve regarding interest rates, along with recent inflation numbers, has made smaller companies’ stock prices swing wildly.
The Russell 2000 index, a representative sample of small-cap stocks, saw a week of daily 1% rises or falls – a streak mirroring one last seen in March 2023. Though it recovered slightly on subsequent trading days, the index is still struggling, up only 0.3% year-to-date.
Why the Volatility?
Small-cap companies are heavily influenced by interest rates and economic prospects. They often rely on borrowing to fund expansion, and high rates mean less access to cheap funding. Investors pile into small-caps when they think rates will soon drop, then pull out when rates are set to rise again.
Economic news and Fed announcements now fuel these rapid investor shifts. Disappointing January inflation figures triggered a sharp Russell 2000 fall, whereas dovish Fed commentary later offered a boost. Investors remain highly sensitive to rate and economic signals, and the small-cap segment takes the brunt of the uncertainty.
Expert Takes
Experts see differing reasons behind the volatility:
Anna Rathbun (CBIZ Investment Advisory Services): Emphasizes the impact of rates and the ongoing uncertainty about a ‘soft landing’ for the economy.
David Lefkowitz (UBS Global Wealth Management): Sees small-caps playing catch-up if rates fall; otherwise, this outperformance likely won’t persist.
Steve Sosnick (Interactive Brokers): Believes the current rotation into small-caps is fueled by short-term momentum-seeking as opposed to strong fundamentals.
Beyond the Headlines
Volatility aside, it’s vital to remember that small-cap companies frequently offer unique advantages. This segment includes many fast-growing, innovative firms, providing investors a chance to get in on potentially massive success stories early. However, their smaller size often also carries increased risk. Lack of financial track record, vulnerability to market shifts, or susceptibility to leadership changes add challenges alongside the potential rewards.
