Watch Out For Small Cap Stocks in 2018 Because… Volatility?

According to Jefferies strategist Steven DeSanctis, we should be careful about chasing gains in small-cap stocks in 2018.

Decent prediction. But why, one wonders, does DeSanctis warn about small stocks in 2018?

According to DeSanctis, “Volatility is at its lowest level ever and should go higher.”

Volatility is low, and has been, for quite some time. Not news.

Before volatility can rise, and possibly impact the Russell 2000, we’d need a catalyst.

We’ll deal with that in a second. First, let’s look back at this time last year.

A year ago, DeSanctis whiffed on his prediction for the Russell 2000 in 2017.

CNBC reports that DeSanctis admits his 2017 estimate was “way too conservative.”

A fair assessment. As of yesterday the small cap Russell 2000 index is sitting at 1,518. That’s 108 points better than DeSanctis’ original forecast of 1,410.

Year to date the index is up 11%. In small cap world otherwise:

The Vanguard Small-Cap ETF (NASDAQ: NEASX) is up almost 12% for the year and the iShares Core S&P Small-Cap ETF (NYSE: IJR) is up over 10% year to date.

Small Stocks chart

It’s true that large cap indexes have generally performed better than small caps this year.

The S&P 500, for example, is up 18% year to date.

Now back to small caps in 2018 and the potential for more market volatility.

Here’s two years of the VIX, the “volatility index”, the market’s “fear gauge:”

VIX chart

Is higher volatility in the year ahead possible? Certainly.

Is it equally likely volatility, like interest rates, stays “lower for longer” than anyone might expect? Certainly.

First, we’d need a spark for higher volatility. Your guess is as good as anyone’s. North Korea. Russia investigation bombshells. A market shock of some kind.

Then, that increasing volatility would have to knock small stocks off kilter. When it’s equally likely more volatility could send some small stocks ripping higher.

The point is, anyone can look at the Russell 2000 in December 2017 and make a prediction.

Think through what you hear and come to your own conclusions.

Small stock expert Greg Guenthner, sitting ten feet to my right, shrugged when I told him of DeSanctis’ prediction. Seemed a good response.

Play the market as it stands and react to what actually happens. You can’t go wrong with that.

Now, turning to the tape this morning…

Market Rundown for Wed., December 6

S&P 500 futures are off 16.00 pre-market, or 0.72%, at 2,625.

Oil’s down $1.51 at $56.89.

Gold’s on sale, off $13.90 at $1,268.

Bitcoin sits – but probably not for long – at $12,857 this morning.

You want to see real volatility? Big jumps up, swings down, a room that never stops spinning.

Watch Bitcoin’s price action.

Leave a comment below.

Talk with you again on Friday.

For the Rundown,

Aaron Gentzler

Aaron Gentzler

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Aaron Gentzler

Aaron Gentzler is the publisher of Seven Figure Publishing. He is also the editor of The Rundown and has been with Agora Financial / Seven Figure Publishing since 2005. He's been covering technology and markets for over a decade.

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