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Smaller stocks soaring, leading market but trend not expected to last

By STAN CHOE, Associated Press
Published: February 10, 2019, 6:06am
3 Photos
FILE- In this May 9, 2013, file photo, Allegiant Air flight attendant Chris Killian prepares his passengers for the Laredo, Tex, bound flight before it pushes back from the terminal at McCarran International Airport in Las Vegas. Smaller-company stocks like Allegiant Travel and Shutterfly have been soaring since late December and leading the rest of the market, a sharp reversal from much of the winter, when smaller stocks were plunging more than the rest of the market.
FILE- In this May 9, 2013, file photo, Allegiant Air flight attendant Chris Killian prepares his passengers for the Laredo, Tex, bound flight before it pushes back from the terminal at McCarran International Airport in Las Vegas. Smaller-company stocks like Allegiant Travel and Shutterfly have been soaring since late December and leading the rest of the market, a sharp reversal from much of the winter, when smaller stocks were plunging more than the rest of the market. (AP Photo/David Becker, File) Photo Gallery

NEW YORK — The stock market’s biggest gains are once again coming from its smallest companies, but the trend may not last much longer.

Smaller-company stocks such as Allegiant Travel and AK Steel have been soaring since late December and leading the rest of the market, a sharp reversal from much of the winter, when smaller stocks were plunging more than the rest of the market. The Russell 2000 index of small-cap stocks has jumped 19.8 percent since Christmas Eve versus 16.2 percent for the big stocks in the S&P 500 large-cap index, though neither has returned to the records they set late last year.

Bed Bath & Beyond, for example, has surged 46.3 percent since Christmas Eve, helped by a stronger-than-expected earnings report where it said it’s ahead of plan in eventually returning to profit growth.

Besides earnings reports, smaller stocks have also been benefiting in recent weeks from reduced worries that the Federal Reserve will raise interest rates too quickly.

The Federal Reserve has pledged to be patient in raising interest rates, even though the economy is still growing, with inflation low and worries high about weakening growth. That’s a big deal for investors in small-company stocks, because they often carry higher levels of debt than their bigger rivals, which gets more expensive as borrowing costs rise.

Stocks in the S&P 600 small-cap index have about 3.3 times more in net debt than they do in earnings before interest payments, taxes and other items. The big stocks in the S&P 500, meanwhile, have just 1.7 times more debt than earnings before interest payments, taxes and other items.

Just don’t count on this run to last forever.

“We love the bounce back, but we don’t anticipate the momentum continuing,” Jefferies strategist Steven DeSanctis wrote in a recent report.

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