Small cap stocks – those related to companies with market capitalization between about $300 million and $2 billion – are the market’s canary in the coal mine.
Given the small sizes of these companies, they are typically more susceptible to economic swings than their larger, better capitalized, competitors and are often among the first to encounter difficulties when consumers begin to pull back on spending. That’s why it’s troubling to consider that the valuation of the Russell 2000, which tracks small cap stocks, relative to the S&P 500 has recently dropped to levels not seen since the post-dot-com bubble in 2001.
But that is not to minimize the role of the consumer in small caps’ struggles. As consumer spending has slowed, the more economically sensitive companies at the smaller end of the spectrum are clearly feeling the pinch.
At Anchor Capital, we always keep an eye on economic indicators or market events that could potentially increase or decrease market volatility and market risk.
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