Vanguard Says Small-Cap Stocks Are Still Cheap After July Rally

In a recent interview, Greg Davis, president and chief investment officer of Vanguard, expressed optimism regarding the ongoing rally in small-cap stocks, citing a favorable valuation gap and the current economic climate. The small-cap Russell 2000 index has surged nearly 10% in July, contrasting with a flat S&P 500 and a 2% decline in the Nasdaq Composite. Notably, small-cap value stocks, particularly the Vanguard Russell 2000 Value ETF (VTWV), have outperformed, rising by 11.9%. Davis noted that the small-cap rally is a response to a market that has been predominantly driven by major technology firms like Nvidia and Microsoft. While he acknowledged that the market appears top-heavy, he reassured investors that it has not yet reached the extremes seen in previous historical periods. He encouraged investors to diversify beyond the S&P 500 to mitigate risks associated with a concentrated market. Looking ahead, Davis highlighted the importance of political and policy factors in shaping market dynamics for the remainder of 2024. He advised investors to remain focused on long-term objectives and to disregard the distractions of the election cycle. On the policy front, Vanguard anticipates a Federal Reserve rate cut later this year, with additional cuts expected in 2025, which could further benefit the small-cap sector. Vanguard, known for its pioneering index funds and managing approximately $9 trillion in assets, recently appointed Salim Ramji as CEO, succeeding the firm's founder, Jack Bogle.