U.S. Investors Pulled Out $8-B In Small-Cap Stocks In 2 Months

Small-cap stocks have been hurt by $8 billion in outflows from exchange-traded funds (ETFs) focused on that segment, says Jefferies.

Photo Insert: Small-cap stocks have bled billions of dollars via ETFs with tighter bank lending standards a major pressure point for the group.

That started in March when Silicon Valley Bank and Signature Bank were seized, spooking investors, Carla Mozee reported for Business Insider.

The debt-ceiling standoff has also hurt small-caps, but not everything is doom and gloom for the group.

Small-cap stocks have bled billions of dollars via ETFs with tighter bank lending standards a major pressure point for the group, but Jefferies sees some upside drivers for that portion of the US stock market.

The Russell 2000 small-caps index is lagging behind the S&P 500 this year, edging up about 0.3% compared with the gain of 7% for the large-cap index. Zooming out further, the Russell 2000 has dropped by roughly 29% from its November 2021 peak while the S&P 500 has lost 14% from its high logged in January 2022.

"Banks are a big part of small caps and are headwinds for the size segment," Jefferies strategist Steven DeSanctis wrote in a Wednesday research note.

The other overhang is the debate between lawmakers over raising the $31 trillion debt ceiling that's needed to pay the country's bills and avoid a default. Meanwhile, small-cap stocks, which make up just over 4% of the equity market, tend to perform worse than large-caps when the economy is veering into a recession.

Federal Reserve staff economists expect a "mild recession" to begin later in 2023.

"All of these concerns have been manifested in the fact that nearly $8 billion has been withdrawn from the size segment's ETFs since March putting pressure on performance," DeSantis said. "If outflows slow or stop, this would help the size segment."

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