Sean Anthony Eddy
BCA Research said it recommends favoring the S&P Small Cap 600 Index (SP600)(IJR) over the Russell 2000 Index (RTY) for those who want to invest in small-cap stocks.
The independent investment research firm looked at small caps as part of its Q3 strategy note last week, as that market cohort trades at a steep valuation discount to its large-cap counterparts. The firm foresees the U.S. economy falling into a recession in late 2024 or early 2025, calling the consensus soft-landing narrative “wrong”.
As small-caps tend to have a somewhat higher beta to the market than large-caps, a recession would disproportionately hurt smaller companies, many of which have highly cyclical businesses and are quite reliant on bank financing, Peter Berezin, chief global strategist at BCA, said.
But the Russell 2000 (RTY) has “many more unprofitable companies”, and scores lower on most quality measures compared with the S&P 600 (IJR),” he said. “The Russell 2000 has also seen much slower earnings growth and price appreciation than the S&P 600,” Berezin said.
The S&P 600 Index (SP600) has lost 2.5% this year and the Russell 2000 (RTY) slipped about 0.3% while the S&P 500 (SP500)(SPY)(VOO) has advanced ~15%. Rising interest rates have been among the headwinds for small-caps. The S&P SmallCap 600 represents ~3% of the U.S. market, according to S&P Global.
Investors can track small-cap stocks through ETFs including (SPSM), (DFAS), (IWM) and (VIOO).
