1987 again?# Stock
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The stock market hasn’t started a year this strongly since 1987 — uh-oh!
Published: Jan 17, 2019 10:37 p.m. ET
https://www.marketwatch.com/story/small-cap-stocks-are-off-to-the-best-start
-to-a-year-since-1987-uh-oh-2019-01-17
Much has been made about the performance of stocks so far in 2019.
Small-cap stocks, as gauged by the Russell 2000 index RUT, +0.86% , are off
to their best start to any year in the past 32 years, boasting a gain of 8.8
% over the past 12 trading sessions, according to Dow Jones Market Data.
That’s outpacing the large-cap S&P 500 SPX, +0.76% the U.S. stock-market
benchmark, which is up 5.2% over the same stretch — a performance, however,
that likewise is the strongest 12-day start to a calendar year in 32 years.
The Dow Jones Industrial Average DJIA, +0.67% is up 4.5% over the same
period, while the Nasdaq Composite Index COMP, +0.71% has logged a 6.8%
advance.
Is it a reason to cheer? Perhaps it would be if not for the fact that the
gains are the strongest since 1987, when the Russell popped 11.87% over the
first 12 trading days and the S&P rallied 11.22%. 1987 is a year that lives
in infamy on Wall Street.
On Oct. 19, 1987, the Dow sank 22.6% in a single session, marking its
steepest percentage drop ever. That is not at all to suggest that similar
action will play out this time around.
However, a number of strategists have been warning that gains in small caps
aren’t likely to be lasting. MarketWatch’s Chris Matthews writes that
investors have been drawn to the relative bargains that small-cap stocks are
trading at compared with their larger-cap brethren, but noted that analysts
are advising caution in investing in the group.
Separately, MarketWatch’s Barbara Kollmeyer, citing Andrew Lapthorne, a
quantitative analyst at Société Générale, warns that U.S. small caps
will be in the center of the next storm for stocks because those companies
tend to carry larger debt loads relative to their heftier peers and are
sensitive to rising interest rates.
“U.S. small caps have been taking on a massive amount of leverage over the
past few years,” particularly starting in 2013 during the [quantitative
easing] years, wrote Lapthorne.
Although the Federal Reserve appears to be in pause mode, the central bank
does want to eventually normalize interest-rate policy, which may add more
friction for small-cap names.
Back in 2018, shares of those companies enjoyed a bounce because they were
perceived as being more resilient than larger multinational companies amid
trade disputes between the U.S. and its trade partners, namely China.
However, after punching higher, that rally faded hard and fast as a
resolution between Beijing and Washington failed to materialize.
Investors should hope that the same narrative, or an uglier one, doesn’t
play out this year.
Published: Jan 17, 2019 10:37 p.m. ET
https://www.marketwatch.com/story/small-cap-stocks-are-off-to-the-best-start
-to-a-year-since-1987-uh-oh-2019-01-17
Much has been made about the performance of stocks so far in 2019.
Small-cap stocks, as gauged by the Russell 2000 index RUT, +0.86% , are off
to their best start to any year in the past 32 years, boasting a gain of 8.8
% over the past 12 trading sessions, according to Dow Jones Market Data.
That’s outpacing the large-cap S&P 500 SPX, +0.76% the U.S. stock-market
benchmark, which is up 5.2% over the same stretch — a performance, however,
that likewise is the strongest 12-day start to a calendar year in 32 years.
The Dow Jones Industrial Average DJIA, +0.67% is up 4.5% over the same
period, while the Nasdaq Composite Index COMP, +0.71% has logged a 6.8%
advance.
Is it a reason to cheer? Perhaps it would be if not for the fact that the
gains are the strongest since 1987, when the Russell popped 11.87% over the
first 12 trading days and the S&P rallied 11.22%. 1987 is a year that lives
in infamy on Wall Street.
On Oct. 19, 1987, the Dow sank 22.6% in a single session, marking its
steepest percentage drop ever. That is not at all to suggest that similar
action will play out this time around.
However, a number of strategists have been warning that gains in small caps
aren’t likely to be lasting. MarketWatch’s Chris Matthews writes that
investors have been drawn to the relative bargains that small-cap stocks are
trading at compared with their larger-cap brethren, but noted that analysts
are advising caution in investing in the group.
Separately, MarketWatch’s Barbara Kollmeyer, citing Andrew Lapthorne, a
quantitative analyst at Société Générale, warns that U.S. small caps
will be in the center of the next storm for stocks because those companies
tend to carry larger debt loads relative to their heftier peers and are
sensitive to rising interest rates.
“U.S. small caps have been taking on a massive amount of leverage over the
past few years,” particularly starting in 2013 during the [quantitative
easing] years, wrote Lapthorne.
Although the Federal Reserve appears to be in pause mode, the central bank
does want to eventually normalize interest-rate policy, which may add more
friction for small-cap names.
Back in 2018, shares of those companies enjoyed a bounce because they were
perceived as being more resilient than larger multinational companies amid
trade disputes between the U.S. and its trade partners, namely China.
However, after punching higher, that rally faded hard and fast as a
resolution between Beijing and Washington failed to materialize.
Investors should hope that the same narrative, or an uglier one, doesn’t
play out this year.