Under the pressure of high valuations, Omi Keron "adds fuel to the fire", and US small-cap stocks have recently suffered a heavy setback

Time:2022-01-01 Source: 1296 views Trending Copy share

Zhitong Finance APP observed that small-cap stocks in the U.S. stock market generally suffered heavy losses on Monday, especially small-cap stocks affected by travel restrictions were sold sharply by investors, mainly due to the rapid spread of Omicron in Europe and North America. Many countries are planning to implement stricter lockdown measures, and the business expansion of some companies may be blocked as a result.

Earlier this month, the Russell 2000, a benchmark index of small-cap stocks, fell into a correction phase, falling more than 10% from the record high on November 8, and falling more than 3% in the past week. The index is currently 14% below its historical high, and the S&P 500 large-cap index has fallen only 3.6% since the Omikjon mutant virus appeared in South Africa in November .

Many analysts believe that small listed companies with a market capitalization of about US$2 billion or less tend to be less diversified than large companies, which makes betting on these companies even more risky in times of economic uncertainty.

Some market views believe that the decline in small-cap stocks may herald market expectations of slower economic growth, because economically sensitive stocks such as energy, finance, and industry account for more than the S&P 500 in the Russell 2000 Index . In addition, under the expectation of the Fed to raise interest rates , high-value small-cap stocks often appear to "kill valuation" , and the market generally begins to chase large-cap stocks with higher performance certainty .

Scott Colyer, CEO of Advisors Asset Management, said in an interview with the media: "In general, during an economic downturn , large-cap stocks are more capable than small-cap stocks to raise funds by acquiring more resources in the capital market." "But small. Cap stock companies usually do not rely much on international sales, so they have fewer supply chain problems. I think the current sell-off may be due to high valuations and tax loss sales near the end of the year (to offset part of the capital gains tax) ."

During the COVID-19 pandemic, it is not the first time that there has been a significant difference in trends between small-cap stocks and large-cap stocks in the U.S. stock market.

In the selling wave caused by the new crown epidemic in early 2020, the Russell 2000 index has been under greater pressure than the S&P 500 index. Although late last year, the prospect of the new crown vaccine pleased investors, the economic recovery was faster than expected and helped to promote a period of continuous small-cap stocks leading the upsurge.

However, for most of this year, small-cap stocks in the U.S. stock market have underperformed large-cap stocks, but at the beginning of November, small-cap stocks outperformed large-cap stocks. The reason is that concerns about long-term inflation prompted investors to bet on those. They hope that by raising product prices, companies that can quickly respond to inflation.

"Let's go through January 2022 and see to what extent the poor performance of small-cap stocks is related to tax loss selling." Colyer added. "Now, compared with the above two factors, the market is more worried about whether the spread of Ome Keron mutant virus will intensify, leading to strict global blockade measures. Under this pessimistic expectation, the business scope is narrow. The stocks fell sharply."

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