RBC’s Jonathan Golub and team note that “changing valuations, not changing fundamentals” are behind the wreckage in the small-company Russell 2000 this year:
Small caps have outperformed their larger peers throughout the recovery. However, since mid-March this trend has reversed, with large caps rising 5.9% (excluding dividends) while small caps have fallen 5.7%…The recent underperformance largely reflects a shift in investor sentiment. More specifically, multiples have collapsed this year despite an increasingly favorable corporate backdrop, shown in Exhibit 3 below. Put differently, changing valuations, not changing fundamentals, are behind the selloff.
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In other words, it’s your fault for not paying more for their earnings.
iShares Russell 2000 Index ETF (IWM) has fallen 1% to $109.97 at 2:11 p.m. today, while the Russell 2000 is off 1% at 1,107.22.
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