As the first quarter of 2015 winded to a close, small-cap stocks turned in better performance than large-caps. The Russell 2000 index added 3.9% year-to-date, compared with just 1.1% for the S&P 500. Here our are top four trends to watch for the rest of 2015.
Some strategists believe that the strengthening dollar is holding back the results of large multinationals that depend on sales made outside of the U.S. for a large portion of their earnings. Domestic small-cap stocks don’t have this problem since their sales are predominantly made within the U.S. Conversely, though, if the dollar were to reverse course and weaken, small-caps would be adversely affected.
The strengthening U.S. economy may also give small-caps a greater boost than large-caps since U.S. growth continues to outpace the growth reported in many other developed countries of the world. Similarly, the sharp drop in energy prices this year may be giving smaller companies more benefit from increases in operational efficiency and cost containment.
The question of what the Fed will do with respect to interest rates is also looming large in the minds of investors. There is a growing consensus that the Federal Reserve will increase rates, perhaps as early as this fall. This could impact both large and small companies, particularly those that rely on continuing influxes of capital to fuel their operations, but large dividend-paying companies could find less interest in their stocks from investors who might find “safer” yields from bank savings instruments.
As average valuations for stocks both large and small remain high, some market watchers expect to see volatility at higher levels than usual for the remainder of the year. Stocks are likely to see their prices driven only by the earnings of the underlying businesses. That’s just another reason to focus on growing businesses with strong fundamentals for your stock portfolio, whether large or small.
In the March 2015 issue of the SmallCap Informer, you’ll find two stock selections for your review. Our first company pick is a maker of automobile parts that keep drivers warm in their seats. Our second focus stock is a small property and casualty insurance company with expertise in a segment that many insurers are shying away from. In this issue, we are also discontinuing coverage of three companies. Their stocks have not lived up to our expectations and we are recommending that subscribers consider them for sale.
- DOUGLAS GERLACH