The mega-cap tech rally did not let U.S. small-cap stocks raise their heads high this year. In fact, one measure showed large-cap stocks beating smaller companies by the widest margin in 25 years, per a Wall Street Journal article.
However, tables are turning for the pint-sized stocks.The Russell 2000 has gained 6.6% past month versus 4.2% gains in the S&P 500. The index is up 3.3% past week versus a 0.6% uptick in the S&P 500. Let’s find out why the rally is taking place.
Debt Deal Is Done
Recently, President Biden signed debt ceiling bill that pulls U.S. back from brink of unprecedented default. The deal boosted the nation’s debt ceiling, averting an unprecedented default on the federal government’s debt. This again boosted overall investor risk appetite, propelling cyclical stocks and small-cap stocks.
Personal Savings Rising From the Year-Ago Level
U.S. consumers have been able to maintain savings despite high inflation. Though the savings rate dropped 4.1% in April from 4.5% in March, the level has been hovering in the more than 4% range this year. This marks a huge jump from the one-year low of 2.7% we saw in June 2022. Households are drawing down excess savings cautiously, likely due to recession concerns.
Upbeat Jobs Data
The U.S. economy added 339,000 jobs in May 2023, the maximum in four months, and breezing past market forecasts of 190,000. Figures for March and April were revised up, bringing employment 93,000 higher than previously reported. Figures hint at a tight labor market, with employment rising by an average of 314,000 per month so far this year. In May, average hourly earnings for all employees on private nonfarm payrolls increased by 11 cents, or 0.3%, to $33.44. Over the past 12 months, average hourly earnings have risen 4.3%.
Higher Greenback in the Cards?
A solid jobs report has raised the odds of a rate hike in July. Additionally, inflation remains sticky, which will make it difficult for the Fed to cut rates later this year. This, in turn, should boost the greenback. With small-cap companies being more inclined to the domestic economy and having less foreign exposure, a stronger U.S. dollar is beneficial for the segment.
Small-Cap ETFs in Focus
Against this backdrop, below we highlight a few small-cap ETFs that gained in the past one month. These funds have trumped the S&P 500 (up 4.4%) past month (as of Jun 9, 2023).