Small-Caps Lose During Periods of Rate Hikes
The Russell 2000 ETF (IWM), comprised of the 2000 smallest companies in the greater Russell 3000, is a proxy for small-cap public companies.
Small-caps tend to experience amplified interest expense burden as federal policy rates are lifted (as they are expected to be lifted a whole 100bps through 2022). This is because small-caps have a third of their debt in variable interest rates—meaning as rates rise, the interest expense they pay on debt increases (Source: Bloomberg (below)).
The IWM currently sits at a price level of interest to traders around 12/2020 and 1/2021—buyers and sellers fought to push prices beyond ~$192. During this visit to the price level of interest, the Federal Reserve statements of higher future interest rates may act as a catalyst, playing in favor of sellers.
Further, as investors' money flies from unprofitable growth companies to stable, profitable growth companies, IWM faces pressure. 31% of the companies making up IWM are unprofitable, compared to only 5.7% of the Russell 1000 (largest 1000 companies).
This pair of catalysts may be the breaking point of $192. However, from a historical perspective, it seems that small-caps tend to recover their losses during rising interest rate environments approximately a year after the first hike. Meaning a revisit of the ~$169 price level could be an interesting buying opportunity for long-term traders. More research is needed surrounding the recovery of small caps amid increasing rates. Any ideas or supporting research are welcomed. Thanks.
Sources: Bloomberg, WSJ
(Unfortunately cannot post links to these articles as a basic member; please message me for the sources).
Small-caps tend to experience amplified interest expense burden as federal policy rates are lifted (as they are expected to be lifted a whole 100bps through 2022). This is because small-caps have a third of their debt in variable interest rates—meaning as rates rise, the interest expense they pay on debt increases (Source: Bloomberg (below)).
The IWM currently sits at a price level of interest to traders around 12/2020 and 1/2021—buyers and sellers fought to push prices beyond ~$192. During this visit to the price level of interest, the Federal Reserve statements of higher future interest rates may act as a catalyst, playing in favor of sellers.
Further, as investors' money flies from unprofitable growth companies to stable, profitable growth companies, IWM faces pressure. 31% of the companies making up IWM are unprofitable, compared to only 5.7% of the Russell 1000 (largest 1000 companies).
This pair of catalysts may be the breaking point of $192. However, from a historical perspective, it seems that small-caps tend to recover their losses during rising interest rate environments approximately a year after the first hike. Meaning a revisit of the ~$169 price level could be an interesting buying opportunity for long-term traders. More research is needed surrounding the recovery of small caps amid increasing rates. Any ideas or supporting research are welcomed. Thanks.
Sources: Bloomberg, WSJ
(Unfortunately cannot post links to these articles as a basic member; please message me for the sources).
Feragatname
Bilgiler ve yayınlar, TradingView tarafından sağlanan veya onaylanan finansal, yatırım, işlem veya diğer türden tavsiye veya tavsiyeler anlamına gelmez ve teşkil etmez. Kullanım Şartları'nda daha fazlasını okuyun.