It Could be a Cruel Summer for Small Caps, Analyst Warns

The economic recovery from reopening prospects have provided a nice tailwind for small cap equities, but some analysts are warning that it could be a cruel summer ahead. This is especially so if the recovery is not as strong as optimistic investors think.

Per a MarketWatch report, “the Russell 2000 index RUT, -0.00%, which tracks the performance of small-cap stocks, rose 20.9% during April and May, it is largest two-month percentage gain since 2009 and it is best two-month relative performance to the S&P 500 index SPX, -0.33% since February of last year, according to Dow Jones Market Data.”

“We’re seeing lots of green shoots here,” Steven DeSanctis, small-cap equity analyst at Jefferies told MarketWatch.

“Fed Chair Powell has been vocal that further stimulus is a necessity to deliver to American workers and small businesses,” he wrote, with reference to U.S. Federal Reserve Chairman Jerome Powell. “Yet since the House passed its $3 trillion Heroes Act May 15, in the Senate, there has been silence. Deafening silence as politicians on both sides mistake stock market strength…for economic recovery.”

However, as stimulus subsides and unemployment remains elevated, it could provide an environment for small cap pain. Congress still hasn’t passed an amendment to the Paycheck Protection Program, which would give small businesses the additional time to access emergency capital to stay afloat.

“Businesses large and small have their futures stakes on the premise that [normal economic activity]will resume in late summer or early fall,” wrote Julian Emanuel, chief equity and derivatives strategist at BTIG. “Combined with escalating China tension, social unrest of Main St. USA and the outperformance of small-caps” could feed into “a small-cap summer setback.”

Investors looking for options in the current pandemic can look at funds like the Goldman Sachs Equal Weight U.S. Large Cap Equity ETF (GSEW). GSEW seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Solactive US Large Cap Equal Weight Index (GTR).

The fund seeks to achieve its investment objective by investing at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index. The index consists of equity securities of large capitalization U.S. issuers. The index is an equal-weight version of the Solactive US Large Cap Index, a market capitalization-weighted index that includes equity securities of approximately 500 of the largest U.S. companies.

For more market trends, visit ETF Trends.