(April 20th Weekly Market Update

Small caps have had a very strong start to 2015. The small cap Russell 2000 Index hit a fresh all-time high last week (on tax day, April 15, 2015) and has outpaced large caps by 205 basis points (2.05%) year to date. This year’s strength follows a strong fourth quarter rally when the Russell 2000 Index rose 9%, outpacing the large cap Russell 1000 Index by 5 percentage points. Here we look at the drivers of this strength and discuss our small cap outlook.


After material underperformance throughout much of 2014, since October 2014, small caps have staged a solid comeback. We attribute the rebound to a number of factors:

ƒƒEquity market sensitivity (beta). In general, when the broad stock market rises, small cap stocks tend to capture a larger share of those gains than large caps. Since September 30, 2014, which roughly marks the start of the reversal in small cap performance, the all cap Russell 3000 Index is up 7%, the Russell 2000 Index is up 13.8%, and the large cap Russell 1000 Index is up just 6%.

ƒƒImproved performance of cyclical stocks. The Russell 2000 Index includes a 77% weighting in cyclical sectors  (consumer discretionary, energy, industrials, materials, technology, and financials), compared with 71% for the Russell 1000 Index. Accordingly, when cyclical sectors outperform defensives, which tends to correspond to a rising broad stock market, small cap’s relative performance has historically been better.

For the full article: SIZING UP SMALL CAPS