Traders may be feeling some whiplash when it comes to small-cap stocks, but choppiness aside, that section of the market just booked a rare surge.
In the 50 trading days since the U.S. stock market’s Oct. 27 lows, the Russell 2000
RUT
has surged more than 20% — its strongest 50-day rally since 2020 and one of only 21 such periods since 1979 that saw a rally of equivalent or greater scope, according to analysts at Bespoke Investment Group (see chart below).
Bespoke Investment Group
Before the big market moves during the early days of the COVID pandemic in 2020, there was one rally of similar scope in March 2019. Before that, investors have to go back to 2012 to find a comparable experience, the analysts noted.
The benchmark Russell 2000 spent most of 2023 in the doghouse, languishing much of the year in negative territory as its large-cap brethren, particularly megacap tech stocks, soared. Then came November.
Small-caps roared back, with the Russell 2000 jumping nearly 22% over the last two months of the year, leaving it with a 2023 gain of 15.1%. That helped narrow the gap with its large-cap peers, though it still significantly underperformed the S&P 500’s
SPX
24.2% gain and the Nasdaq Composite’s
COMP
43.4% rally. It did surpass the Dow Jones Industrial Average’s
DJIA
13.7% gain.
So what happens next? Only time will tell, of course. But the historical record is encouraging.
Bespoke found that in the weeks and months after the index first crossed the threshold of a 20%-plus rally in a 50-trading day span, returns tended to surpass the median performance (see chart below).
Bespoke Investment Group
“Whether you look at the very short-term (one week) or over the long-term (one year), the Russell’s median performance following these surges has been considerably better than the index’s long-term average returns for all periods since 1979,” the analysts wrote. “Of course, past performance is no guarantee of future results, but we think this is helpful to know nonetheless.”
That 50-day rally was tempered a bit by a pullback since the start of the new year that’s seen the Russell 2000 and the S&P 600
SML,
another small-cap benchmark, fall more than 3% while the S&P 500 was off slightly.
UBS Global Wealth Management, meanwhile, argued in a Wednesday note that investors should consider adding small-cap exposure.
“Our expectation for 9% earnings growth for the S&P 500 in 2024 suggests low-double digit earnings growth for the S&P 600 small-cap index. This is a substantial improvement from the roughly 10% decline in S&P 600 profits in 2023,” wrote Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management.
“So, to capture more market upside in case of a continued equity market rally, we believe investors should complement core quality stock holdings with tactical exposure to U.S. small-caps,” she said.
