Will Small Cap Stocks Catch Up to Large Caps?

Will Small Cap Stocks Catch Up to Large Caps?

Posted On November 20, 2019 1:39 pm

Historically small cap stocks have enjoyed long periods in which they outperform broader indices and larger cap indices, especially during times of economic expansion.  The theory is that smaller companies’ businesses are still in the higher growth period of their lifecycle.

But there may have been structural changes in the economy and the way investment dollars are allocated that suggest small caps may never recapture their magic.

As you can see the Russell 2000, which is comprised of companies with market caps ranging from $500 million to $6 billion, has lagged both the S&P 500 (black line) and Nasdaq 100 (red line) since 2013 when the economy was just starting to gain positive traction after the financial crisis.


The underperformance of the iShares Russell 2000 ETF (IWM)  has only worsened since the low of December a year ago.

One of the immediate causes for the divergence can be pinned on the energy sector which comprises about 18% of the Russell compared to just 5% of the S&P 500 and basically zero for the Nasdaq.

The chart below shows how far stocks in the S&P 1500 are trading relative to their 52-week highs broken out by sector…

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.