Looking at the price-to-earnings (P/E) ratios, dividend yields and corresponding price-to-dividend ratios (just 1/dividend yield) of these indexes, I believe the irony is that the more expensive part of the market could be in the non-yield-oriented sectors. And their performance has the potential to hold up better in the event that the Momentum-led small-cap growth segment starts to sell off. Subject to change.
Performance and Valuation Measures of Small-Cap Indexes (as of 7/15/14)
I agree with comments from the Fed that parts of the small-cap market—particularly some of these small-cap small-cap growth and momentum stocks—look more stretched than broader equity markets, like the S&P 500 or Russell 3000 Indexes. As a result, within small-cap allocations, I think investors should look to over-weight, or rotate, into the small-cap dividend or small-cap dividend growth segments of the small-cap market to mitigate the risk of exposures that may be more speculatively priced.
1Board of Governors of the Federal Reserve System, “Monetary Policy Report,” U.S. Federal Reserve, 7/15/14.
2Board of Governors of the Federal Reserve System, “Monetary Policy Report,” U.S. Federal Reserve, 7/15/14.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. Investments focusing on certain sectors and/or smaller companies increase their vulnerability to any single economic or regulatory development.