After enjoying a good run in the first three quarters of 2018, the stock market has had a roller-coaster ride. The unusual wild swings in the markets left investors nauseous, worrying where the world economy will head into 2019.
What Spooked the Markets?
A concoction of factors is to blame for the extreme volatility in the market. These include trade tensions, concerns over slowing global economic growth, uncertainties surrounding Brexit and other geopolitical concerns, and a drop in crude oil prices to a bear market territory. Oil prices cratered to their lowest levels in more than a year earlier this month on growing supply and global growth concerns. While prices crawled back recently, they are set for the first yearly decline in three years.
Trade frictions have also caused a slowdown in growth in China as well as Europe. Another worrisome factor that spooked investors is the inversion of the yield curve (long-term rates are below short-term rates) that often signal a slowdown and even a possible recession. Moreover, the U.S. Federal Reserve’s aggressive interest rate hikes this year have caused panic in the markets. Higher interest rates typically slow down economic activity.
All these made investors extremely jittery and caused major market indexes fall into the negative territory this year. The Dow Jones Industrial Average, which touched all-time high of 26,951.81 in October, has shed around 14%. The S&P 500 scaled a record high of 2,940.91 in September, triggered by a batch of positive U.S. economic data. However, the benchmark hit an eight-month low earlier this month on global growth concerns. The S&P 500 is now down roughly 15% from the peak level. The tech-heavy Nasdaq composite index is also down 19% from the all-time high of 8,133.30 it reached in August.
Both the Dow Jones and the S&P 500 have erased the gains they racked up during the first half of the year and are down 7.1% and 7.8% this year (as of Dec 28), respectively. The Nasdaq composite is also down 6% for the year.
Russell 2000 Slides into Bear Market
The Russell 2000, the benchmark index for U.S. small-cap stocks, has lost ground after outperforming its larger counterparts for the most part of 2018. The index scaled an all-time high of 1,742.09 on Aug 31 as investors flocked to small-caps to shelter themselves from trade-related tensions.
Unlike its larger peers, small-cap stocks with minimal international exposure are largely insulated from geopolitical and trade-related issues. Investors sought refuge in small caps as they viewed trade tariffs would hit big, multinational companies more than domestically focused small firms.
However, things turned ugly since the onset of the fourth quarter, the index being in the correction territory, having lost around 23% from the record high level. It is also down 13.7% this year. Worries about slowing economic growth, concerns over potential disruptive impacts of tariffs on small businesses and negative effects of higher interest rates contributed to the selloff. Higher interest rates bump up the cost of capital for small-cap companies, making it tough for them to operate. Moreover, many economists believe that the U.S. economy may witness a slowdown or recession next year. All these dented investors’ appetite for small-cap stocks.
The Russell 2000 had a good year in 2017 with the index racking up double-digit gains. President Donald Trump’s business-friendly tax reform (reduction of corporate tax from 35% to 21%) being one of the key catalysts behind the index’s rally last year. Small-cap stocks that generate most of their sales from within the United States are one of the biggest beneficiaries of Trump’s tax cut policy. However, Wall Street economists are concerned that the benefits of the tax cuts will fade in 2019. As a result, this may weigh on cash flows and profits of small-cap companies next year.
5 Russell 2000 Stocks to Bet in 2019
After having a great run through the third quarter of 2018, the Russell 2000 ended the year on a sour note owing to the above-mentioned factors. However, we suggest you to place your bet on these small-cap stocks as they could help the index bounce back in 2019.
However, picking winning stocks can be a daunting task. This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We narrowed down our search on five stocks with a market capitalization of below $1 billion. These stocks have a Zacks Rank #1 (Strong Buy) and a VGM Score A or B. Also, the stocks have been witnessing positive earnings estimate revisions, which generally translate into rapid price appreciation. You can see the complete list of today’s Zacks #1 Rank stocks here.
Verso Corporation VRS makes printing papers used primarily in commercial printing, media and marketing applications. The company sports a Zacks Rank #1 and a VGM Score A. The Zacks Consensus Estimate for 2019 has improved by 14.2% over the last 60 days. The stock has also gained 26% this year.
Great Lakes Dredge & Dock Corporation GLDD is a leading provider of dredging services in the United States conducting business to maintain and deepen shipping channels, reclaim land from the ocean, and renourish the storm-damaged coastline. The company sports a Zacks Rank #1 and a VGM Score A. The Zacks Consensus Estimate for 2019 has improved by 142.9% over the last 60 days. Moreover, the stock has gained 20.2% this year.
On Deck Capital, Inc. ONDK is an on-line platform that uses a big data, analytic model to source, underwrite and fund loans to small businesses. The company sports a Zacks Rank #1 and a VGM Score A. The Zacks Consensus Estimate for 2019 has improved by 22.7% over the last 60 days. The stock is also up 4.4% this year.
Heidrick & Struggles International, Inc. HSII is a leading provider of leadership consulting, culture shaping and senior-level executive search services. The company carries a Zacks Rank #1 and a VGM Score B. The Zacks Consensus Estimate for 2019 has improved by 6.3% over the last 60 days. The stock has also gained 26.5% this year.
Shoe Carnival, Inc. SCVL is one of the largest family footwear retailers in the United States. The company carries a Zacks Rank #1 and a VGM Score B. The Zacks Consensus Estimate for the next fiscal year has improved by 11.9% over the last 60 days. The stock has gained 32.8% this year.
In addition to the stocks discussed above, would you like to know about our 10 top tickers to buy and hold for the entirety of 2019?
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Great Lakes Dredge & Dock Corporation (GLDD) : Free Stock Analysis Report
On Deck Capital, Inc. (ONDK) : Free Stock Analysis Report
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Heidrick & Struggles International, Inc. (HSII) : Free Stock Analysis Report
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