3 Minute Case Study: US Small-Caps vs. Large Stocks

Welcome to Lemonade Stand Finance!

Here’s todays rundown

• 2 minute case study on whats happening in the market now with small cap and large cap stocks

• Tonnes of learning and financial literacy packed in

• 30 second summary on what else is happening in the investment world today

Let’s get down to business!

Small Cap Vs. Large Cap

There’s a new twist in the world of stocks! U.S. small-cap stocks have been underperforming compared to their larger counterparts, something we haven't seen in over two decades. We unpack this shift, and show you a clear view of what's happening in the stock market and why.

Summary

• Think of the stock market as a race between different types of runners. Recently, the smaller runners (small-cap stocks) have been falling behind the bigger ones (large-cap stocks) – a change from their usual pace.

• The Russell 2000 index, which tracks these smaller companies, has grown 24% since 2020, but it's trailing behind the S&P 500’s growth of over 60%.

• Historically, small-caps have been like sprinters – capable of fast, impressive growth, but now they're slowing down.

• Why is this happening? Two main reasons: rising interest rates and high inflation.

• These factors make it harder for small companies, often with less financial cushion, to thrive.

• Imagine them running with heavier backpacks, while the larger companies, like those in the S&P 500, are more equipped to handle these challenges.

• Interestingly, there was a brief moment during the early pandemic days when small-caps outperformed, but that was an exception.

• Before the 2000s, when global interest rates were higher, these small, less-known companies often outdid the big players.

• It’s a reminder that the stock market can be unpredictable and influenced by various economic factors.

Educational Insights

1. Understanding Small-Caps vs. Large-Caps: Small-cap companies are like hidden gems – smaller in size but with potential for significant growth. Large-cap companies are the giants of the market, often more stable but with slower growth. It's a choice between potential rapid growth and stability.

2. The Impact of Interest Rates and Inflation: High interest rates make borrowing money expensive, which can be a bigger problem for smaller companies that may rely more on borrowed funds. Inflation means the cost of everything goes up, squeezing the profits of these smaller companies.

3. Market Cycles and Investment Strategy: The stock market is like the ocean; it has its tides. Sometimes small-caps are on top, sometimes large-caps. This cycle affects how investors decide where to put their money.

4. The Role of Earnings: Earnings are like the report card for companies. They show how well a company is doing. The Russell 2000’s earnings fell by 17.6% year-on-year, while S&P companies saw a 4% rise. It's like comparing two students' grades to understand their performance.

5. Looking to the Future: Despite the current situation, there's hope that small-cap earnings could improve, especially if interest rates start to decrease. This could be like a breath of fresh air for these smaller companies, potentially making them attractive to investors again.

Jargon Simplified

• Russell 2000 Index: A list tracking 2000 smaller companies in the U.S. stock market.

• S&P 500: A list of 500 of the largest companies in the U.S. stock market.

• Interest Rates: The cost of borrowing money.

• Inflation: When prices for goods and services rise.

• Earnings: The profit a company makes.

Bullet News Summary

• Trump's Social Media Stake Worth $4.6 Billion: After market debut, shares in Trump's social media group soar, elevating the value of his stake significantly.

• Tom Hayes Loses Appeal: Tom Hayes' appeal in the Libor scandal is rejected, upholding his conviction for interest rate manipulation.

• FTX 2.0 Plan Abandoned: Plans to revive Sam Bankman-Fried's FTX as 'FTX 2.0' collapse amid feasibility concerns.

• Cash Investment Shift: Investors focus on short-term CDs for better returns as Federal Reserve hints at rate cuts.

• DOJ Scrutinizes Apple's $77bn Buyback: Amid antitrust concerns, the DOJ questions Apple's large-scale stock buybacks, hinting at competitive and innovation issues.