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Small-Cap Rally in the Cards at Year-End & Beyond? ETFs in Focus

Wall Street has seen a surge in small-cap stocks, with the Russell 2000 index climbing over 4% on Nov 14, 2023. This rally coincides with cooling inflation data for the month of October. iShares Russell 2000 ETF IWM jumped as much as 5.5% on Nov 14.

Experts believe it may mark the start of a fourth-quarter rally for small-cap stocks. Let’s find out the factors behind this rally and what it means for investors, as well as the outlook for 2024.

Small-Cap Rally in the Cards?

Eric Green, CIO of Penn Capital Management, suggests that this rally has been long overdue, given the prolonged outperformance of large-cap stocks, as quoted on Yahoo Finance. Valuations for small-cap companies have become compressed relative to their larger counterparts, making them an attractive option for investors.

A Less-Hawkish Fed

The latest employment report and the Consumer Price Index data both indicate that inflation is on the decline. This may cause a less-hawkish Fed in the near term. Following the release of this data, market indicators showed a about 95% probability that the Federal Reserve would keep interest rates unchanged in December, as reflected in data from the CME Group.

Upbeat Holiday Season Sales in the Cards?

The National Retail Federation (NRF) stated that consumers are estimated to shell out between $957.3 billion to $966.6 billion during November and December. Thus, spending will increase between 3% and 4% over the same period last year. The growth may be slightly lower compared to recent years, but it’s still in line with the growth rate from 2010 to 2019, when the average annual holiday outlays jumped 3.6%. Now, lower inflation can boost investor confidence and drive growth in this sector.

M&A Activities to Pick Up In Small-Cap Space?

Apart from reduced inflation, other factors are contributing to the rally in small-cap stocks. Per strategists, seasonality tends to benefit small caps towards the end of the year, making this an opportune time for their growth. Additionally, the valuation gap between large and small-cap companies, as well as private and public markets, suggests that mergers and acquisitions (M&A) activity may pick up. Companies may find it more attractive to acquire smaller, faster-growing firms, taking advantage of the valuation discrepancy.

Upbeat 2024 Outlook for Small Caps?

For 2024, Eric Green points out that small caps are currently priced for a likely recession. In contrast, large-cap stocks have not priced in the possibility of a recession. This pricing disconnect suggests that small-cap stocks may be primed for a rally in 2024. Investors need to consider this factor when making investment decisions for early 2024.

Top-Ranked ETFs in Focus

Against this backdrop, below we highlight a few top-ranked small-cap ETFs (Zacks Rank #2 (Buy)) that could be tapped now.

Vanguard Small-Cap ETF VB – Up 4.5% on Nov 14, Down 8.9% Past Three Months

Invesco S&P SmallCap 600 Pure Growth ETF RZG – Up 4.7% on Nov 14, Down 7.3% Past Three Months

Vanguard S&P Small-Cap 600 Growth ETF VIOG – Up 5.1% on Nov 14, Down 8.1% Past Three Months

Vanguard S&P Small-Cap 600 ETF VIOO – Up 5.4% on Nov 14, Down 9.9% Past Three Months

iShares Core S&P Small-Cap ETF IJR – Up 5.4% on Nov 14, Down 9.9% Past Three Months



Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

iShares Russell 2000 ETF (IWM): ETF Research Reports

Invesco S&P SmallCap 600 Pure Growth ETF (RZG): ETF Research Reports

iShares Core S&P Small-Cap ETF (IJR): ETF Research Reports

Vanguard Small-Cap ETF (VB): ETF Research Reports

Vanguard S&P Small-Cap 600 Growth ETF (VIOG): ETF Research Reports

Vanguard S&P Small-Cap 600 ETF (VIOO): ETF Research Reports

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Zacks Investment Research