Small Caps measured by the Russell 2000 small cap index are still heavily overvalued. It has fallen significantly in the last couple of months but it is far more expensive than it looks. Even with the recent market pullback, the leading U.S. small cap index still looks quite bubbly. The Russell 2000’s trailing P/E ratio (of the last 12 months) remains elevated at 40. That means that at current earnings, you’d have to wait 40 years for the companies to earn as much as you paid for them.
No-one should be buying such an expensive stock index, especially in this market. The trade wars appear to be heating up. The Fed just hiked rates again. And nobody knows for sure what it’ll do next.
The Fed has kept interest rates artificially low for almost 10 years now, and the results of this experiment have yet to play out. Many companies are addicted to these low rates and won’t survive without them. That includes much of the Russell 2000. An amazing 84% of the Russell 2000 with a credit rating is junk-rated. These debt-laden companies are already beginning to show signs of stress despite the fact that interest rates are still incredibly low by historical standards. What happens if the Fed actually keeps hiking? It won’t be pretty. Rather put money to work in private start-ups than small cap stocks.
For now, steer clear of U.S. small cap indexes!
Skip to content
Live life to the fullest! Life is too short…!