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Why Small-Cap Stocks Could Surge After Interest Rate Cuts
September 18, 2024
In September, the Federal Reserve cut interest rates for the first time in over four years. Historically, after a Fed rate cut, stocks across all market caps tended to rally, but small caps outperformed. That’s likely because small caps collectively rely more heavily on external financing than their larger-cap peers, so falling borrowing costs are a tailwind.
Small caps have gained the most when the Fed has cut rates
Performance after first rate cut
Past performance is no guarantee of future results. Source: Jefferies using Federal Reserve Board, Haver Analytics, Center for Research in Securities Prices (CRSP®), and the University of Chicago Booth School of Business. Note: used fed funds rate from 1954 until 1963, then used the discount rate from 1963 until 1994 and the fed funds rate thereafter. Market caps defined by CRSP based on placing market caps into deciles. Deciles 1 and 2 are large, and 6 through 8 are small.
Because rate cuts were delayed compared to initial market expectations at the beginning of 2024, small caps trailed large caps in the first half of the year, resulting in a historically wide performance gap. Leading up to September’s first cut, however, small caps beat large caps by 465 basis points over July and August (Russell 2000 vs. Russell 1000).
The long-awaited rate reductions coupled with the more attractive valuations of small caps make it an interesting time for the asset class and an opportune time for investors. Additionally, we will soon be entering what has traditionally been a seasonally favorable period for small caps—the fourth quarter.
Many signals point to small caps vying for equity leadership. Investors should seriously consider Calamos Timpani Small Cap Growth Fund (CTSIX), which actively pursues the fastest growing companies exceeding expectations to capitalize on potential long-term small-cap appreciation. Focusing on companies with improving economic fundamentals has served the fund well in 2024. We believe those characteristics will continue to be in favor, and asset-class tailwinds may provide an additional boost for these stocks.
Before investing, carefully consider the fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
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Index Definitions
The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index. The Russell indices are published and maintained by FTSE Russell.
Unmanaged index returns assume reinvestment of any and all distributions and, unlike fund returns, do not reflect fees, expenses or sales charges. Investors cannot invest directly in an index.
Important Risk Information
An investment in the Fund(s) is subject to risks, and you could lose money on your investment in the Fund(s). There can be no assurance that the Fund(s) will achieve its investment objective. Your investment in the Fund(s) is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund(s) can increase during times of significant market volatility. The Fund(s) also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
The principal risks of investing in the Calamos Timpani Small Cap Growth Fund include: equity securities risk consisting of market prices declining in general, growth stock risk consisting of potential increased volatility due to securities trading at higher multiples, and portfolio selection risk. The Fund invests in small capitalization companies, which are often more volatile and less liquid than investments in larger companies.
As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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