The increase in interest rates by the Fed has made them lose appetite for unprofitable companies to Wall Street and the Russell 2000 correct a 17% since its record closing in November last year, according to Karen Langley en The Wall Street Journal.
The prospect of rising interest rates has been especially difficult for the Russell 2000, largely due to the high proportion of small-cap companies that aren’t making money.
During the market sell-off of recent weeks, investors have shed speculative investments from technology stocks to cryptocurrencies. Speculative investments with their promise of higher returns thrived in the environment of 2021 ultra-low rates. Now that the Federal Reserve can raise interest rates as early as March to fight inflation, investors are less comfortable with risk.
The companies that represent the 31% of Russell 2000 were not profitable at the end of 2021, according to an analysis of Jefferies of earnings during the previous 12 months. On the contrary, the 5.7% of the index Russell 1000 of larger companies was made up of companies without benefits.
That disparity has been evident in the performance of the indices in recent weeks. Even with his profit from the 2.3% on Monday, the highest among the main US stock indices, has fallen one 17% since its record closing in November. The Russell 1000, by contrast, is down just one 8,4% of his record, according to FactSet.
“The ones that don’t win are the riskiest of the risky stocks,” he said. Steven DeSanctis, Small-Cap and Mid-Cap Strategist at Jefferies. “These stocks generally do poorly, very poorly, in the face of a Fed hike.”
“Within the Russell 2000, stocks of nonprofit companies have fallen more this year than the index as a whole,” according to DeSanctis. News earlier this month that the Federal Reserve could raise interest rates as early as March changed investors’ calculations in the stock market, causing distant gains were less attractive.
Small-cap companies with net losses in the past 12 months, according to FactSet, include online fashion company Stitch Fix Inc., the cosmetics company Revlon Inc., the pharmacy chain Rite Aid Corp. and the company biofarmacéutica Cytokinetics Inc.
Shares of Stitch Fix have fallen a 14% so far this year, while Revlon shares have declined by 17%, Rite Aid shares have lost a 25% and shares of Cytokinetics have fallen a 31%.
Shares of companies that promise high future growth have also lagged the broad stock market to date. The Russell 1000 growth rate, for example, dropped a 12% in 2022, Meanwhile he Russell 1000 value index fell only one 3,6%. Growth stocks are also losing to value stocks among small caps.