Small-cap stocks are getting hammered — three experts debate what to do next


The small-cap Russell 2000 index has seen better days. The group of stocks has fallen into a correction, and is currently on track for its worst month since January 2016. Here’s what three experts have told CNBC in the last week about the move.

  • “The trade war is still top of mind. Small caps have an opportunity to come back. In a sell-off like this, beta rules, so the increased volatility of small-caps come to the fore. Also, in small caps, you do have a lot of junk, 40 percent don’t make money, a lot of leverage, so the quality side of small caps can give you some of the protection from the trade wars, but not all the downside of all that leverage and interest rate sensitivity,” Simeon Hyman, head of investment strategy at ProShares, said.
  • Dan Suzuki, portfolio strategist at Richard Bernstein Advisors, says small caps’ underperformance began long ago. He said, “There’s a lot of talk about how small caps are finally in a correction now, but if you look at the history, small cap relative performance, I think peaked in 2013. From that perspective, it’s been a relative bear market for a long time. And it’s because the fundamentals haven’t kept up with the large caps. If you look at earnings growth over the last three or four years, they’ve actually under-grown, whereas usually you’d think when growth is good, they’re actually outperforming. Their leverage is close to all-time highs. They have a huge portion of their debt that’s in floating rate as opposed to fixed. There’s a lot of issues that are specific to small caps that are the cause of a lot of this divergence we’re seeing today.”
  • “We always get excited this time of year, right before earnings, because we take direction from a lot of the large-cap companies. They’re the customers and partners of small-caps. So what we’re going to listen to from CEOs is their perspective, their investments, what they’re looking to do, which should then benefit the small-cap area. One area we have been watching is the high-yield market. It has been coming in. It’s somewhat of a proxy for small-cap companies. It hasn’t completely collapsed. We haven’t seen a panic in the area, but we have seen some pullback correction, which right now we think is quite healthy,” said Chris Retzler, co-manager of the Needham Growth Fund, who said he still believes tax reform will act as a tailwind for the space, though not to the extent the group saw earlier this year.

Bottom line: Small cap stocks have come under pressure, but some money managers are still bullish on the group, citing relative protection from trade war-induced volatility and the potential for further benefiting from tax reform.

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