Featured article: Small-cap stocks poised to benefit from Fed’s easing cycle
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A boost for small caps: Better access to funding and beyond
The Fed’s first cut—and the assumption of more to come—is a boost for small-cap stocks. Compared to larger companies, small-cap businesses tend to have more floating-rate loans vs. fixed-rate debt. As such, many small-cap firms will see their existing loan payments shrink as interest rates decline. Rate cuts bring better access to funding for smaller firms along with the potential for several other constructive outcomes, including:
Easing conditions fuel investor support for Russell 2000 Index
Leading up to the Fed’s September decision, market moves reflected optimism about the pace of forthcoming rate cuts. In July, for example, the Russell 2000 Index?jumped more than 11%?in just five trading sessions as the Fed Funds futures market priced in additional cuts.
Over the three-month period ended September 30, the small-cap benchmark rose more than 9%, outpacing its large-cap counterpart, the Russell 1000 Index, which gained just 6%.
Related content: Zooming out on the Russell 2000 rebound
Featured video
In this episode of Macro Microscope, Indrani De focuses on a key theme of 2024: hidden under a broad market rally are some unusual trends. Indrani identifies some surprising market shifts: "risk-off" gold outperforming U.S. equities, many non-U.S. equity markets closing the performance gap with U.S. equities, unusual performance of ‘defensive’ Utilities relative to AI-driven Technology and the different reaction of the U.S. long yields to rate cuts. ?Indrani also identifies some major changes in global trade and emerging markets that underpin these unusual market moves. John Dioufas takes the stage to continue the discussion on economic fragmentation. He provides insights into six extraordinary economic surprises in the last 12 months of U.S. Labor Market data releases and illustrates how economic fragmentation is beginning to show through employment data in the U.S. and what this means for global markets.
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APAC Financial Markets Spotlight quarterly report
Authored by our Global Investment Research team
Returns Diverged in a Shifting Monetary Landscape
With the Fed cutting its policy rate by a cumulative 75bps, many APAC markets have begun to follow. However, markets such as Australia and India kept rates on hold. China’s fixed income, equity and FX rallied, driven by large-scale stimulus, while Japan experienced declines across these assets. Generally, performance diverged in equities, fixed income and FX across APAC markets over 3M, ending October 31, 2024.
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Valuation Matters – are shifts in index composition impacting market valuations?
In recent years, valuations across both equity and high yield credit markets have increased markedly and have become a key focal point for analysts and market commentators alike. As of June 30, 2024, the index-level option adjusted spread for the FTSE US High Yield index was sitting at 354 basis points or around the 85th percentile in terms of ‘expensiveness’ when compared to monthly OAS over the past 20 years. Similarly, the index-level price-to-earnings multiple of the FTSE US equity index hit 21.5 at end-June or around the 85th percentile when compared to monthly readings since 2008.
With investors increasingly wary of these high valuations, we investigate to what extent valuations within both credit and equity markets have been impacted by changes in index composition and whether controlling for these changes would result in valuation metrics being less extreme on a true comparative basis. We also revisit the conclusions of a previous paper on valuations, titled “Valuation Matters – US high yield and US equities”, where we showed that valuations in both asset classes have predictive power in forecasting future returns and aim to further build on that research by looking at whether valuations that control for compositional changes are more effective in forecasting.
Related content: Valuation Matters – US high yield and US equities
Index idea
Millennial's view index funds as route to stock market gains
Our ‘Addendum on Millennials’ to our 2024 FTSE Russell Retail Investor Survey reports that while index fund investing is growing across all ages, Millennials (ages 28– 43) are leading the way in the belief that it’s the best way to profit from the stock market. Just as Millennials are known for adopting newer areas of investing such as alternatives and cryptocurrencies, so too they’re leading the surge in index fund investing.
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With over $18 trillion in reported fund assets under management benchmarked to our indices, FTSE Russell is a leading global index provider across asset classes and investment styles.