U.S. Small-Cap Stocks Rebound From Correction Territory

Small-cap U.S. stocks steadied from what was poised to be the longest slide since January, recovering from a retreat that came after Federal Reserve Chair Jerome Powell signaled that both fiscal stimulus and progress at beating back the pandemic are already baked into the central bank’s optimistic outlook.

The prospect that the steep rally in small-cap equities has gotten ahead of the nation’s growth prospects had driven the Russell 2000 Index down since Monday before reversing course with a gain Thursday. Before that midday turnaround the gauge was headed toward a correction, typically defined as a 10% drop from a peak.

“It looks like the Russell 2000 is going through a similar corrective process as the Nasdaq recently went through,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Both indices have had phenomenal runs and were both due for a pullback.”

The Russell 2000 more than doubled over the previous year amid optimism that the economy was poised for a sharp recovery. Those outsize gains left the small-cap stocks vulnerable to a setback if investors sold to lock in gains.

U.S. Small-Cap Stocks Rebound From Correction Territory

On Monday, CFRA Research warned clients the Russell 2000 appeared “vulnerable for profit-taking.”

“I expect additional weakness,” Sam Stovall, chief investment strategist at CFRA Research, said in a message. Though he added that the index “needs to retest its 50-day moving average before we know for sure whether the weakness will continue.”

The cohort of small-cap stocks have typically underperformed large technology stocks that get far more attention from investors. Yet that was different as equities rallied back from the March 2020 panic set off by the pandemic, with the Russell 2000 outpacing even the tech-heavy Nasdaq Composite Index during the rebound.

“Small caps have lagged for years so we’re glad to see them finally get their day -- but it’s come pretty far pretty fast,” said Lamar Villere, portfolio manager at Villere & Co. “They’ve been on a tear. They got more beat up than large caps during the downturn so they had more of a boomerang. But it’s fast moving and gone pretty far. So it’s hard for us to find value there.”

Others are more optimistic. Michael Contopolous, director of fixed income at Richard Bernstein Advisors, said that despite the Russell 2000’s decline this week “this will all be short-lived.”

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