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Why Small Cap Carnage Matters?

Th sharp downside divergence between small and large cap performance, i.e. the small cap fall more than the large cap significantly,  could spell trouble ahead for the broader market, according to some analysts and investors.

Russell 2000 index is the small cap index.  It is made up of the bottom 2000 stocks by market cap in Russell 3000 index.

Typically small cap companies are less diversified businesses with often heavier debt burdens that, according to BlackRock’s Richard Turnill “leaves them less resilient during periods of decelerating growth and rising uncertainty, like the one we see ahead in 2019 as the U.S. economy enters a late-cycle phase.”

Why when it is significant if small cap performed worst than the large cap?

  1. In general, small caps are very sensitive to where the economy might be going.  They are in general “beta-driven”, i.e. one in which stocks move in tandem based on macroeconomic news rather than company-specific information.
  2. When macroeconomic concerns are the major driver of stock prices, it makes sense to continue to expect small-cap stocks to act as a leading indicator.
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