Small-cap stocks face dual risks of rising! Societe Generale calls for laying out Russell 2000 index put options to hedge risks.

After the longest consecutive gains in the US stock market in 20 years, a strategist at BNP Paribas in France believes that now is a good time to guard against a small-cap stock decline. Greg Boutle, head of US stock and derivatives strategy at the bank, believes that the rapid rise in the stock market in late April seems to be losing steam. Boutle said that the reversal of fortune for small-cap stocks could be the most severe in the near future. He advised traders to buy put options (betting that stocks will fall to a certain level) on the Russell 2000 index, which is mainly composed of small-cap stocks, and to buy options expiring in July to capture two potential events that could cause volatility: Wednesday's Fed rate decision and the end of the suspension period for Trump's reciprocal tariffs. He said in an interview, "We believe that small and medium-sized stocks are fundamentally weaker priced, higher leveraged, and lower profit margin parts of the market, so if the economic slowdown becomes more severe, they will be hit first." He added that economic data released in June and July are more likely to reflect a slowdown in hiring and consumer spending related to tariffs. Despite these risks, the hedging costs for small-cap stocks are relatively lower compared to the S&P 500 index, making them an attractive hedging tool in the eyes of strategists like Boutle. In fact, the implied volatility indicator for the iShares Russell 2000 ETF is currently near its lowest level since March 2020 compared to the SPDR S&P 500 ETF trust fund. Although the market generally expects the Fed to maintain interest rates, all eyes will be on Fed Chairman Powell's press conference, where he may provide clues on how to deal with the impact of tariffs. Boutle said, "If the Fed sends a hawkish signal causing the stock market to fall, this hedging strategy will work." But even if the FOMC meeting is relatively 'dull,' there is still ample time for tariff-related pressures to impact small businesses in the US. Last month, due to concerns about economic growth slowdown from Trump's tariffs, small-cap stocks fell by 14% in four trading days, which harmed primarily domestically focused companies more than multinational corporations. Although small-cap stocks have since regained some lost ground, the risks of stubborn inflation and escalating geopolitical tensions pose a huge threat to small businesses. Of course, the stock market rally may continue unabated, especially if Powell hints at a rate cut at the mid-June meeting. Furthermore, Boutle mentioned that trend-following hedge funds are expected to buy around $20 billion in stocks this week, having already bought $10-15 billion in late April. This momentum buying may thwart hedging strategies based on pessimistic expectations for the US economy. Boutle said, "Tactically, this is an excellent balancing tool for hedging overly stubborn bearish positions." However, other analysts also recommend buying put options on the Russell 2000 index. Jeff Jacobson, head of derivatives strategy at 22V Research, wrote in a report to clients on May 4th: "I continue to view small-cap stocks as the new preferred hedging tool," noting a resurgence in strength of large-cap tech stocks. "When the leaders are performing poorly, and small-cap stocks cannot outperform large-cap stocks, what chance do they have now?"