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NEW YORK (Reuters) – Small-cap stocks were among the biggest losers during the stock market’s rout late last year as investors worried about high leverage, but they have outperformed in 2019’s rebounding market, with shares of debt-laden companies leading the charge. So far this year, the small-cap Russell 2000 index has advanced 12.9 percent, versus a 9-percent gain for the benchmark S&P 500 index. Another small-cap index, the S&P 600, has gained 12.1 percent. An expected pause in the Federal Reserve’s course of interest-rate hikes – and optimism that a recession is not imminent in the next 12 months – support a further run in small-caps, investors say cufflink makers. The caveat is that as economic growth and corporate earnings taper off, these companies will find it increasingly difficult to make payments on their borrowings..
The rebound comes after the Russell 2000 and the S&P 600 both hit levels in December that were more than 20 percent below their August peaks, which many investors consider confirmation of a bear market. The S&P 500 bottomed 19.8 percent below its September peak, just missing the bear designation. Small-cap stocks’ performance typically tracks investor appetite for debt cufflink makers. Though the median debt-to-equity ratio for the S&P 500 is greater than that for the Russell 2000, small-caps are seen as more sensitive to debt concerns because such companies often secure financing through bank loans with adjustable rates rather than fixed-rate bonds..
Last year’s rise in interest rates means more and more highly-indebted companies may have to scramble to make payments cufflink makers. The number of companies struggling with debt obligations is near record highs, according to the Institute of International Finance. Moreover, of Russell 2000 companies, 38.3 percent have no net income, whereas only 1.4 percent of S&P 500 companies have no net income. In December, credit spreads, the difference in yield between corporate securities and U.S. Treasuries, widened by the most in more than seven years for both high-yield and investment-grade corporate bonds, according to ICE BofAML index data..
But as credit spreads have narrowed, a sign investors are less risk-averse, small-cap stocks have climbed cufflink makers. They got a further reprieve last Wednesday when Federal Reserve policymakers signaled a pause in its tightening cycle. “With still-low interest rates and an environment of still-solid growth, the concerns about how many (companies) will default are just pushed off to the next slowdown in the cycle, which we don’t see happening anytime soon,” said Kate Warne, investment strategist at Edward Jones in St. Louis..
Highly leveraged companies led the way down in late 2018 and have led the way higher this year cufflink makers. In the fourth quarter, the Russell 2000 companies whose shares were in the highest quartile of percentage declines had a median debt-to-equity ratio of 41.1 percent. By contrast, Russell 2000 companies whose shares were in the lowest quartile of percentage declines had a median debt-to-equity ratio of 32.3 percent, according to a Reuters analysis. However, in January, the first group gained 16.6 percent on average, while the second group gained just 4.7 percent..