Small-cap stocks are hurting from an $8 billion problem

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Investors have pulled $8 billion from this pocket of the stock market in just 2 months on recessions worries and debt ceiling fears

Small-cap stocks have bled billions of dollars via exchange-traded funds with tighter bank lending standards a major pressure point for the group, but Jefferies sees some upside drivers for that portion of the US stock market.

"Banks are a big part of small caps and are headwinds for the size segment," Jefferies strategist Steven DeSanctis wrote in a Wednesday research note. Meanwhile, small-cap stocks, which make up just over 4% of the equity market, tend to perform worse than large-caps when the economy is veering into a recession. Federal Reserve staff economists expect a"All of these concerns have been manifested in the fact that nearly $8 billion has been withdrawn from the size segment's ETFs since March putting pressure on performance," DeSanctis said."If outflows slow or stop, this would help the size segment.

Another headwind for small-caps is further tightening in lending standards by banks which started after the Fed began ramping up interest rates to tame hot inflation."Credit is going to be challenging for smaller companies and more costly," said Jefferies.

 

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