US stocks bounce back from worst day in months

Small caps were all the rage amid the Fed pivot.

The Russell 2000 (^RUT) rose more than 20% after the Federal Reserve kept interest rates steady on Nov. 1. The commonly cited index is used to cover small-cap companies, many of which have sold over the past year and a half on fears that higher interest rates will squeeze companies.

But investors have snapped up interest-rate-sensitive sectors as investors are increasingly confident that the Federal Reserve is closer to cutting interest rates than raising them again.

As many strategists highlight that indices like the Russell 2000 are trading at cheap valuations relative to historical benchmarks, small caps have become a favorite among the group.

The graph above shows the rating of profitable companies in the Russell 2000. (Fidelity, FMRCO, Bloomberg)

However, when asked more about small caps, most strategists noted that the Russell 2000 was not directly addressed.

Liz Ann Saunders, chief investment strategist at Charles Schwab, told Yahoo Finance Live that the Russell 2000 does not use a profitable filter. He estimated that 40% of the companies in the index were not profitable, and 31% of the stocks were “zombie companies,” meaning they did not become profitable and did not survive.

“I’m not recommending the code,” Saunders said. “But if you’re looking for an index as a source of ideas, you have a high-quality index with the S&P 600 (^SP600) because of that profit filter.”

“Small caps are heavily weighted,” says Matt Stuckey, senior portfolio strategist at Northwestern Mutual Wealth Management. But he also sees a key difference in what that means. He also likes to go fishing in the S&P 600.

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“This is not unusual for smaller companies that are growing to scale, but in our assessment, we think that more weighted factors like profitability make sense.”

In the last month, the returns of both indices have been almost identical. However, looking back five years, the value-focused S&P 600 has outperformed, growing 65% compared to the Russell 2000’s 55% return.

Source: Yahoo Finance

Source: Yahoo Finance

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