After having their worst start to the year, tech and small cap stocks are starting to show signs of life.
A shift in the market began to take hold in late June, driving the S&P 500 up 9.11% in July. That same month, the Nasdaq (^IXIC), composed mostly of tech and small-cap stocks, outperformed the S&P 500 (^GSPC), posting a 12.3% gain.
For this reason, advisors are returning to previously battered areas of the market, such as technology.
“It’s a good time to take a deep breath and think, are these companies ever going to come back?” VettaFi VP Tom Lydon said on Yahoo Finance Live (video above). “Did I not have them? Did I avoid them? As we look to the future and maybe the prognosis for the markets and the economy, even if it doesn’t isn’t as good as it used to be, is it somewhat stable, is it a buying opportunity, just by the flows we see in areas like tech stocks, like small cap stocks, advisors and individual investors have benefited.”
A combination of interest rate hikes by the Federal Reserve, record levels of inflation and supply chain issues had sent the market into a volatile slide from its peak in late 2021.
Today, with the Fed offering more transparency on rate hikes and investors thinking inflation might come down, many have returned to weaker areas of the market for the potential return on investment.
“A year ago they were really concerned about inflation, number one,” Lydon explained. “Number two, rising interest rates. And geopolitical risk was kind of a distant third. Fast forward to today – not as concerned about inflation. Still high, but not quite as hot than a year ago. Rising interest rates, to a large extent, are priced in. And geopolitical risk, well, it will always be part of it.
Lydon cited Cathie Wood’s ARK Innovation ETF (ARKK) as a prime example of the rebound in tech stocks. Over the past six weeks, the ETF is up 30-35% after a huge 60-70% decline.
Favorable small caps
As the earnings season continues, the biggest surprise, according to Lydon, has been the performance of small-cap stocks.
Small-cap companies — which are defined as having a market capitalization between $300 million and $2 billion — don’t face the same global economic headwinds as large-cap companies like FAANG names, Lydon pointed out. .
“While small caps are a bit more nimble than large caps, they are mostly focused on domestic business,” he said. “And with the huge move in the US dollar, we’ve seen that small-cap companies have taken advantage of that. They can buy services and also products overseas, bring them here for less. And they don’t. I wouldn’t sell as much abroad, which would be more expensive for foreign buyers.”
Nearly three out of four small cap stocks have outperformed both up and down, Lydon noted, signaling that there is still more opportunity.
“With the ability to step on the accelerator if things start to improve, they can really ramp up a lot quicker,” he added. “It’s good to see the big mega-caps starting to bounce back as well. But at this point, when we’ve had a bit of a pullback, a lot of smart investors are trying to pick their spots. Where can they put that dry powder in the work?”
Ethan is a staff writer for Yahoo Finance.
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