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It’s no secret small-cap stocks have been on quite a run over the past few weeks. In fact, with the Russell 2000 — the small cap benchmark — down a bit today, it might be the first session in four when the index won’t etch a record high. At any rate, we thought it might be a good moment to spotlight some warning signs on the small-cap index’s hot streak.
Barclays Capital strategist Barry Knapp sounded off with a skeptical note on Friday, calling small-cap valuations “rich on both an absolute and relative basis.” That echoes worries we’ve heard from other quarters about how pricey smalls have gotten, but what caught our attention was Knapp’s call for an “outright short” on small-caps once Ben Bernanke & Co. slam the brakes on monetary easing, and actually begins raising rates. (Something that’s not expected any time soon.)
With so much hand-wringing going on, MarketBeat dropped a line to Peter Ricchiuti, a professor at Tulane University’s A.B. Freeman School of Business who has been tracking and trading small-cap companies for the past two decades. Are even some of small-cap’s biggest long-term boosters starting to get a bit hot under the collar? Uh, yes.
“I don’t know if it can continue,” Ricchiuti says, ticking off a list of worries. “The gap between pricing on large- and small-caps is, historically, very high. Another negative is that small caps tend to outperform large caps in the early stages of a recovery, and we’re starting to get some traction in the economy. That doesn’t bode well either.”
In the past six months, Ricchiuti says he has sold off many of his small-cap positions, lowering his small-cap exposure to 70% of his positions, from 90%, and plowing proceeds into blue chips like DuPont and Clorox. ”I’m starting to rotate. It is starting to look historically cheap in these large-caps. They haven’t run very much, and they’re good companies,” the professor says.
On the other hand, small-caps have also managed to defy several months of predictions that their run wasn’t sustainable. Last year, the Russell 2000 gained 25%, while the Dow added just 11%.
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Given that the Federal Reserve (monetary policy) and the Congress (fiscal policy) have grasped onto the idea that national austerity might eventually accelerate growth in large firms and government revenues, the prospects for small business remain dismal — with the entire government, including both parties, committed to saving Federalism and the largest public corporations as priority number one (let’s face it, Federalists believe that the largest public corporation and the government are “too big to fail”), small businesses are essentially on the back burner until recovery takes hold (if recovery takes hold) at the top of food chain. The reality is that Main Street America is being collapsed in order to save only the largest public corporations and the Federal government. Most Federalists honestly believe that sacrificing small businesses in America is a fair price in order to save Federalism and is ravenous appetitie for tax revenue. By the way, here’s how the Federal Reserve feels about small businesses:
http://wjmc.blogspot.com/2011/03/americas-main-street-depression.html
Main Street America is in depression, and the Federal government refuses to acknowledge this reality…
MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. The Wall Street Journal's Chief Markets Commentator Dave Kansas and MarketBeat lead writer Matt Phillips spearhead the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Dave at dave.kansas@wsj.com or Matt at matt.phillips@wsj.com.
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