Data suggest the recent rise in interest rates is plaguing smaller stocks.
“Since late August, when small caps peaked, interest rates have marched higher. The yield on the 10-year Treasury note climbed to nearly 3.25 percent earlier this month from less than 3 percent. And the Federal Reserve — which exerts control over short-term interest rates — has signaled that it plans to stick to its plans to keep raising rates in the face of strong economic conditions,” according to the Times.
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Consequently, in a rising rate environment, it will become harder for small-caps to borrow and repay debt. Leverage is “one of the biggest risks” small caps face over the medium term, Jill Carey Hall, U.S. equity strategist at Bank of America Merrill Lynch, told the WSJ.
Looking ahead, it will be hard to find additional reasons for small-caps to outperform large-caps as strong earnings and tax reforms have already been priced into the market, according to Morgan Stanley analysts.
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