After outperforming the large-cap S&P 500 index last year, the Russell 2000 index of small-cap stocks is underperforming this year, with a negative return of 3.9 percent, compared with a positive return of 7 percent for the S&P 500.
And many fund managers anticipate the trend will continue, with a correction of 10 percent or more perhaps in order for the Russell 2000, The Wall Street Journal
"We think the underperformance has only just begun," Wasif Latif, vice president of equities for USAA Investments, tells the paper. Small-cap stocks "may have gotten cheaper, but they're still not attractive to us."
The Russell 2000 had a forward price-earnings ratio of 19.25 Friday, according to Birinyi Associates. That compares with an average of 16.9 since 1994.
Some investors are concerned about the impact of interest rate increases by the Federal Reserve on small-cap stocks. Many economists expect the Fed to begin raising rates in mid-2015.
"Small companies are harder-pressed than larger companies to find financing," Latif notes. They "have a tougher time in a higher-interest-rate environment."
The weakness of small-cap stocks could spill into the market as a whole, market participants say.
"Small caps are really underperforming again, and I think that's the main issue here," JC O'Hara, chief market technician at FBN Securities, tells Bloomberg
"We're seeing the spread between the Russell and the S&P 500 widening out again, and that is worrying some people. Traders want to see small caps participate, and every time they don't, they think, it's still not working."
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