The Russell 2000 index, which tracks small-cap stocks, has seen its year-to-date gains decline from 20% to 14% as of September, while the S&P 500 and Nasdaq-100 have maintained stronger performances. The increase in interest rates and the negative impact on bond prices are primarily responsible for this downturn.
Kevin Gordon from the Schwab Center for Financial Research noted that small caps are more sensitive to interest rate changes than large caps, as evidenced by a high correlation with the 10-year Treasury yield. Recent options trading data indicates a bearish sentiment towards small caps, with more puts than calls being traded in the iShares Russell 2000 ETF (IWM).
Specifically, on a recent Thursday, traders bought 480,000 puts compared to 371,000 calls, suggesting a cautious outlook. Despite these challenges, Gordon emphasized that the fundamentals for some small caps remain strong, supported by improving economic indicators and solid forward earnings estimates