Why Small-Cap Stocks are Lagging and Impact of Fed’s Asset Purchases

By Blu Putnam, Chief Economist & Erik Norland, Senior Economist, CME Group

Why Large Caps Have Done Better Than Small Caps

• Russell 2000 small caps underperformed big caps by 15% Jan.-April.
• Small-cap stocks often outperform during times of economic distress.
• Could underperformance be due to difference in sector weightings?
• Large caps perform better during economic recovery, rising volatility.

Fed Ramps Up Asset Purchases

• Fed’s massive asset purchases are aimed at managing yield curve.
• Fed seeks to avoid volatility in interest rates as budget deficit widens.
• Purchases of municipal and corporate debt could reduce credit spreads.
• Tight credit spreads could help companies raise funds to rebuild.