It is no secret that the stock market’s performance has been rather unpredictable in recent years. In fact, the market’s movements have been so turbulent that it has led to many investors to call for a secular bear market. A secular bear market is defined as a period of several years in which stock prices remain consistently below previous highs.
The impact of a secular bear market on small caps can be significant. Small cap stocks tend to be more volatile than large caps and as such, they are more heavily impacted by macroeconomic trends. For example, during a secular bear market, small cap stocks may suffer due to the lack of liquidity and reduced investor confidence.
Secular bear markets can have a long-lasting impact on small caps. As the market continues to experience periods of downturn, companies that rely on investors for capital become increasingly vulnerable. Without the influx of capital, companies may be forced to lay off employees or close down entirely. This can have an even greater impact on smaller firms that may lack the resources to weather a prolonged period of stagnation.
In addition to the direct impact of the market downturn, there is also an indirect impact from bond yields. When bond yields increase, investors tend to move their money out of stocks and into bonds, driving up bond prices and driving down stock prices. This shift in capital can lead to further downward pressure on the stock market and further weaken the already unsteady small cap stocks.
Finally, the impact of a secular bear market on small caps is not limited to the stock market. Small businesses also take a major hit. If the stock market continues in its current state, loans made to small businesses become increasingly difficult to obtain as investors favor the more secure bonds. The lack of capital and investment into the small business sector hurts both new and existing businesses, resulting in fewer jobs, reduced growth, and a decrease in consumer spending.
The risk of a secular bear market is something that should not be taken lightly. For small cap investors, it is important to be aware of the potential impact of a prolonged period of market downturn. Being aware of the potential risks can help investors make intelligent decisions on how to best protect their investments.