Traders work on the floor of the New York Stock Exchange during afternoon trading on July 26, 2024.
Michael M. Santiago | Getty Images
Stocks have endured a brutal stretch, with the Nasdaq now flirting with correction territory since reaching an all-time high on July 10. Even so, a long-awaited rotation out of tech and into small caps — a trend that kicked off a few weeks ago — could still have legs.
While all indexes have taken a beating in recent trading sessions, the Russell 2000 had shown signs of life before the so-called carry trade and worries about the U.S. economy disrupted its best run in years. A small-cap revival would unequivocally be a positive thing.
Indeed, coming after spikes in the S&P 500 and Nasdaq powered by a handful of companies perceived to benefit most from the boom in artificial intelligence, the increased market breadth may provide stocks the boost they need to overcome the recent rough patch.
Two things need to happen for small caps to regain momentum.
The first is that the Federal Reserve will have to slash rates soon. That seems like a sure thing, with futures markets pricing in a probability of 100% of that happening in September. Notably, this level of certainty is largely responsible for sparking the rotation mentioned above in the first place.
Secondly, we’ll need to see continued economic growth. This is obviously less certain, with July’s labor market data raising some concerns. Yet, the report is not as bad as some have made it out to be. Remember, recessions typically start with layoffs, which is not what the jobs report showed. The issue was more related to demand.
Therefore, the long-talked-about soft landing may still be possible and rate cuts could deliver a cyclical recovery that benefits small firms. The catch, though, is that these companies experience more volatility than their larger peers.
That’s why a fund tracking small caps is a smart bet. The iShares Russell 2000 ETF (IWM) is the largest one, which, along with the fact that it includes diversified exposure to many small companies, means the ups and downs are more muted.
However, it could be worth taking individual positions in a handful of midcap companies that have underperformed this year but could benefit from a further market rotation. One is Fabrinet (FN), a good way to play the increasing importance of data centers since it’s a leading contract manufacturer of optical components.
Silicon Laboratories (SLAB) and Synaptics (SYNA) are also attractive. Each produces discrete semiconductors, which, unlike integrated circuits, are individual units that perform specific functions. That’s an advantage because they can be more easily customized.
Finally, Monday.com (MNDY) is also worth considering. It provides small- and medium-size businesses with a cost-effective, multipurpose alternative to expensive, single-use products such as Salesforce and QuickBooks.
One reason to doubt that a prolonged recovery for cyclically sensitive small caps is in the works: the price of copper. The metal usually goes up when cyclicals are poised for an extended rally. Copper prices, however, have fallen steeply since May.
Still, the performance differential between the Russell 2000 and S&P 500 during the spring reached 30 percentage points, a record. Since then, it has only recouped about 6% of that. Moreover, outside of the “Magnificent Seven”, valuations are reasonable.
Therefore, once all the recent smoke clears and if it becomes apparent that policymakers can pull off a soft landing by cooling inflation and avoiding a recession, rates will come down and the rotation will continue, giving small and midcaps staying power.
— Andrew Graham, founder and managing partner of Jackson Square Capital.
The latest selloff presents a tax planning opportunity, including a “loophole” that could go away amid Congressional tax negotiations, according to Andrew Gordon, a tax attorney, certified public accountant and president of Gordon Law Group.
The strategy, known as “tax-loss harvesting,” allows you to offset profitable investments by selling declining assets in a brokerage or other taxable account. Once your losses exceed gains, you can subtract up to $3,000 per year from regular income and carry excess losses into future years.
Some investors wait until December for tax-loss harvesting, which can be a mistake because asset volatility, particularly for digital currency, happens throughout the year, experts say.
“You should look for these opportunities continually and take advantage of them as they occur,” Gordon said.
You should look for these opportunities continually and take advantage of them as they occur.
Andrew Gordon
President of Gordon Law Group
The crypto wash sale ‘loophole’
When selling investments, there’s a wash sale rule, which blocks you from claiming a loss if you repurchase a “substantially identical” asset within a 30-day window before or after the sale.
But currently, the wash sale rule doesn’t apply to cryptocurrency, which can be beneficial for long-term digital currency investors, experts say.
“If you sell, for instance, bitcoin at a loss today and then buy it back tomorrow, you still have your loss on the books,” Gordon said. “This is an extremely effective strategy for crypto investors because they don’t have to exit their position.”
However, the strategy could disappear in the future as Congressional Republicans seek ways to fund President Donald Trump‘s tax agenda.
In the meantime, “the IRS gives us this loophole. We may as well take it,” Adam Markowitz, an enrolled agent at Luminary Tax Advisors in Windermere, Florida, previously told CNBC.
Of course, you should always consider your investing goals and timeline before implementing the tax strategy.
A worker stocks eggs at a grocery store in Washington, D.C., on Feb. 12, 2025.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
Whether it’s a dozen eggs or a new car, Americans are having a hard time adjusting to current prices.
Nearly all Americans report experiencing some form of “sticker shock,” regardless of income, according to a recent report by Wells Fargo.
In fact, 90% of adults said they are still surprised by the cost of some goods, such as a bottle of water, a tank of gas, dinner out or concert tickets, and said that the actual costs are between 55% and 200% higher than what they expected depending on the item.
Many Americans are still cutting back on spending, making financial choices and delaying some life plans, the Wells Fargo report also found. The firm polled more than 3,600 consumers in the fall.
“The value of the dollar and what it is providing may not be as predictable anymore,” said Michael Liersch, head of advice and planning at Wells Fargo. As a result, “consumer behaviors are shifting.”
Still, adjusting to a new normal takes time, he added: “Habit formation does take a while. Next year what you can imagine seeing is consumers being a little less surprised or shocked by prices and adapting to the current situation to create that goals-based plan.”
Some change is already apparent. Although credit card debt recently notched a fresh high, the rate of growth slowed, which indicates that shoppers are starting to lean less on credit cards to make ends meet in a typical month, according to Charlie Wise, TransUnion’s senior vice president of global research and consulting.
“After years of very high inflation, they are kind of figuring it out,” Wise said. “They’ve adjusted their baseline for what things cost right now.”
But with President Donald Trump‘s proposed 25% tariffs on imports from Canada and Mexico set to take effect in March, there is also the possibility that prices will rise even further in the months ahead.
Consumers fear inflation will pick up
Mexico and Canada tariffs could put pressure on some consumer staples, experts say. That includes already high grocery prices, which are up 28% over the last five years, according to the Bureau of Labor Statistics.
The Conference Board’s consumer confidence index sank in February, notching the largest monthly drop since August 2021. The University of Michigan’s consumer sentiment index similarly found that Americans largely fear that inflation will flare up again.
A recent CreditCards.com survey found that 23% of Americans expect to worsen or go into credit card debt this year, in part because they are making more purchases ahead of higher tariffs.
How to battle sticker shock
Consumer savings expert Andrea Woroch recommends setting a spending plan and tracking expenses. That helps you pinpoint wasteful purchases and those where prices are accelerating and take steps to save.
“Write out all your expenses currently from those essentials and the wants, figuring out an average monthly spend for fluctuating categories,” she said. “Once you have it all listed out, you can begin hacking away at unnecessary purchases or at least set goals for reducing in those nonessential categories.”
Identify triggers that lead to impulse purchases to help dodge them in the future, Woroch also said. “If you can’t resist a sale, then unsubscribe from store newsletters and turn off push notifications in deal apps.”
Ultimately, being more in control of your spending will “reduce the stress that comes with worry about how you’re going to afford higher prices,” Woroch said.
With tax season well underway, you may be eager for strategies to reduce your 2024 taxes or boost your refund. However, there are limited options, especially for so-called “W-2 employees” who earn wages, experts say.
After Dec. 31, there are “very few” tax moves left for the previous year, according to Boston-area certified financial planner and enrolled agent Catherine Valega, founder of Green Bee Advisory.
But there are a few opportunities left before the April 15 tax deadline, experts say. Here are three options for taxpayers to consider.
1. Contribute to your health savings account
If you haven’t maxed out your health savings account for 2024, you have until April 15 to deposit money and score a tax break, experts say.
For 2024, the HSA contribution limit is $4,150 for individual coverage or $8,300 for family plans. However, you must have an eligible high-deductible health insurance plan to qualify for contributions.
“The HSA is easy,” said CFP Thomas Scanlon at Raymond James in Manchester, Connecticut. “If you are eligible, fund it and take the deduction.”
2. Make a pre-tax IRA deposit
The April 15 deadline also applies to individual retirement account contributions for 2024. You can save up to $7,000, plus an extra $1,000 for investors age 50 and older.
You can claim a deduction for pre-tax IRA contributions, depending on your earnings and workplace retirement plan.
The strategy lowers your adjusted gross income for 2024, but the account is subject to regular income taxes and required withdrawals later, said CFP Andrew Herzog, associate wealth manager at The Watchman Group in Plano, Texas.
“A traditional IRA simply delays taxation,” he added.
A traditional IRA simply delays taxation.
Andrew Herzog
Associate wealth manager at The Watchman Group
3. Leverage a spousal IRA
If you’re a married couple filing jointly, there’s also a lesser-known option, known as a spousal IRA, which is a separate Roth or traditional IRA for nonworking spouses.
Married couples can max out a pre-tax IRA for both spouses, assuming the working spouse has at least that much income. It’s possible to claim a deduction for both deposits.
But whether you’re making a single pre-tax IRA contribution or one for each spouse, it’s important to weigh long-term financial and tax planning goals, experts say.