Small Caps Continue Volatile Streak in 2023 as Investors Doubt Soft Landing Narrative
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Small-cap stocks have been on a volatile streak in 2023, with the Russell 2000 index seeing its longest run of 1% moves in either direction since March 2023.
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Small caps are sensitive to interest rates, selling off when rates seem destined to stay high and rebounding on hints of imminent Fed rate cuts.
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Some investors hoped small caps would outperform in 2023 as rates fall, but the sector has lagged so far, up just 0.3% vs 5% for the S&P 500.
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For small caps to sustainably outperform, earnings growth and a resilient economy are typically required, but recent volatility signals doubt on the soft landing narrative.
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The recent small cap rotation may be opportunistic rather than signaling fundamental strength, unless concrete signs of economic strength or easing rates emerge.