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Wall Street is betting big on Main Street

November 19, 2020. Summarized by summa-bot.

(201109) -- NEW YORK, Nov. 9, 2020 (Xinhua) -- People pass by the New York Stock Exchange in New York, the United States, Nov. 9, 2020. U.S. stocks finished mixed on Monday as investors digested news regarding a coronavirus vaccine candidate. The Dow Jones Industrial Average soared 834.57 points, or 2.95 percent, to 29,157.97. The S&P 500 was up 41.06 points, or 1.17 percent, to 3,550.50. The Nasdaq Composite Index decreased 181.45 points, or 1.53 percent, to 11,713.78. (Xinhua/Wang Ying) (Xinhua/Wang Ying via Getty Images)

Coronavirus vaccines are finally in sight -- and investors are celebrating by scooping up the tiny stocks most likely to benefit from the eventual reopening of the US economy.

Instead, investors are plowing money into the Russell 2000, an index of small-cap stocks whose values are largely linked to the whims of the US economy.

Normally, it takes four or five years for small caps to hit all-time highs after a recession, according to Nicholas Colas, co-founder of DataTrek Research.

The rotation into small-cap stocks has driven up valuations of these companies.

These small-cap stocks were crushed during the height of the pandemic because unlike their larger peers, they have less margin for error.

That's huge for small-cap stocks because a large percentage of them are considered "zombie companies," Sonders said, meaning they don't earn enough money to even pay interest on debt.

So if credit markets froze again, perhaps due to the worsening pandemic and Washington's failure to provide more stimulus, small-cap stocks could fall sharply.

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