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Could slumping industrial, small cap stocks be good or bad?

Small cap stocks have not performed the way they usually do — slumping despite the rise of a bull market. Yahoo Finance's Jared Blikre breaks down the performances of small cap stocks while also taking a look at the mixed industrial sector.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

BRAD SMITH: To some investors, the recent downward dip is a little more than a buying opportunity. But should the decline in industrials and small caps be taken more seriously? With us now, we've got Yahoo Finance's Jared Blikre to evaluate this further. Hey, Jared.


JARED BLIKRE: Hey there. Well, I think it's appropriate to look at the small cap market overall, and we can branch out into some of the different sectors. Small caps usually lead on the way up out of a bull market. However, they did not do that this year with that bull market that started last October. In fact, you can see the Russell 2000 going back two years here has basically been trading sideways for about 3/4 of that. And after that liftoff from the October lows last year, well, we got a retest of those lows earlier this year, and we may be getting another one.

Now I think it's really interesting because there's a lot of talk about concentration in the markets right now. And I wanted to show the Russell 2000 versus the S&P 500 equal weight. Now why am I doing it this way? The equal weighted S&P 500 a bit different than how we-- different than how we normally look at it. The equal weight gives every share one basic vote. And we don't have as much influence by the mega caps that we would because of their outsized influence in the regularly calculated S&P 500. So this cyan line, which is the equal weight, you're going to see very closely tracks the purple line, which is the Russell 2000.

Now the Russell 2000 might swing a little bit higher. It has a higher beta, as they say. But nevertheless, I think it's really interesting to look when you have the S&P 500 and you have the mid-caps and the small cap index, you put all of those together, it's the S&P 1,500. And the only thing that's really moving right now are seven of those, at least on a year to date basis. Also want to show you the opposite picture. Here's the NASDAQ 100, which is very heavily weighted towards those mega caps. In the purple line, you can see how that has soared this year and has really held on to a lot of its gains, while the Russell 2000, while the small caps are way down here.

So that just kind of highlights this concentration issue. And going forward with higher rates and a higher dollar, a lot of these markets do not like that setup, especially the higher growth stocks, especially those mega caps. So let me bring it back to the industrial sphere and we can take a look at what has happened on a year to date basis. And you can see there are some clear winners and losers here. The number one GE. Don't count out GE. Remember that stock and in the midst of their turnaround strategy. Here's a look at what they've done over the last two years. You can see really moved off that October low that I was just highlighting a moment ago for the general market, but it has really surged off of that.

Here's a look at GE over the last five years. So all the more impressive. Now it's not that way for everyone. I think we've been talking about Alcoa, that's down 40%. I'll move on to Raytheon Technologies. That has been basically going sideways over the last five years. But I'll say this, as much as it is a headwind for growth stocks, these higher rates, typically, these are good things for the cyclical stocks. Now it depends on the shape of the overall yield curve. But if we are going higher for longer and if we do have a robust economy, the thinking is the cyclical stocks will come back into favor. And so I think that note is kind of touching on that, guys.