Small-Cap Slump Seen When Fed Cuts Bond Buying: Chart of the Day

Shares of smaller companies are destined for declines as a reduction in the Federal Reserve’s bond buying draws closer, according to Barry C. Knapp, Barclays Plc’s head of U.S. equity strategy.

“The turning point in monetary policy is not fully reflected in equities,” Knapp wrote yesterday in a note to clients. Small-capitalization stocks have been spared from the kinds of losses suffered by shares of utilities and other rate-sensitive companies, he wrote.

The CHART OF THE DAY tracks this year’s ratio of the Russell 2000 Index, whose companies have a median market value of $624 million, to the Standard & Poor’s 500 Index, which has a median value of $15 billion. The chart also displays the ratio of the S&P 500 Utilities Index to the S&P 500. Knapp presented a similar chart in his note.

Since April, the Russell 2000 has increased 8.6 percent, beating the S&P 500’s advance of 6.7 percent. The utility gauge has fallen 1.5 percent, the only decline among 10 main industry groups in the S&P 500.

Consumer-discretionary and financial stocks are also at risk, Knapp wrote. They have been the S&P 500’s top performers since the current bull market began in March 2009. The consumer group encompasses retailers, media companies, homebuilders and automakers, among other industries.

Losses in these groups and in small caps may not occur “until much closer to, if not following, the actual tapering announcement,” the New York-based strategist wrote. The Fed’s policy makers are set to hold their next meetings on July 30-31 and Sept. 17-18.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net

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