Rising Markets Boost Small-Cap Equities ETFs

Joel Anderson  |

Bouncing markets on Thursday proved a rising tide that lifted all ships as gains more than trickled down to small-cap companies. While the Dow Jones Industrial Average jumped just under 0.7 percent in early trading, with the S&P 500 gaining about 0.8 percent. However, the gains for small-cap stocks appeared to considerably outpace their blue-chip counterparts, carrying ETFs tracking small-cap equities with them.

The iShares Russell 2000 Index ETF ($IWM) jumped about 1.75 percent, outpacing its underlying index by about a quarter percent. And it was a banner day for most small-cap ETFs, with the iShares Russell 2000 Growth Index ETF ($IWO) gained almost 2 percent, the iShares Russell 2000 Value Index ETF ($IWN) jumping just over 1.5 percent, and the iShares Core S&P Small-Cap ETF ($IJR) up about 1.75 percent. Meanwhile, small-cap bears were hit hard, with the 300 percent leveraged Direxion Daily Small Cap Bear 3X Shares ($TZA) off over 5 percent.

Declining Prices Could Delay Taper

Lower energy costs helped drive whole sale prices lower for the second straight month in October, with the producer-price index falling 0.2 percent after going down 0.1 percent the month before.

“Inflation’s clearly low, but I don’t think it’s getting any lower from here,” said Omair Sharif, a U.S. economist for RBS Securities.

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The primary concern cited by critics of quantitative easing is the potential for inflation rising out of control, so signs that prices are on the decline bodes well for a longer delay of the taper the Federal Reserve has long promised. However, the other factor acting on the decision is economic growth, which may appear strong at the moment, potentially pushing the Fed to sooner.

"Claims and manufacturing activity remain supportive for continued moderate economic growth in the fourth quarter," said Sam Bullard, a senior economist at Wells Fargo Securities (WFC) .

However, rising equities, particularly in the small-cap equities market, would seem to indicate that investors and traders believe that the inflation number will end up being the more important one and the taper maybe be delayed longer than previously believed. The taper could mean rising interest rates, which would tend to hit small-cap companies harder.

Jobless Claims Drop

However, while a growing economy could mean the taper comes sooner rather than later, it’s also possible that the surging markets today were reacting to an improving economic outlook. And positive news regarding the economy also came on the labor front, with the Labor Department’s weekly report showing that initial jobless claims declined by 21,000 last week.

"There is no evidence of a pickup in layoffs and the latest report on claims should be seen as a neutral to slightly positive reading on payroll growth," said John Ryding, chief economist at RDQ Economics.

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