The Smaller They Are, The Harder They Fall?

by: Bespoke Investment Group

After outperforming for months and months, smallcap stocks have gotten crushed over the last week or so. In fact, the smallcap Russell 2,000 index has underperformed the largecap S&P 500 for six days in a row now going back to October 25th.

Since the close on October 24th, the S&P 500 is actually up slightly, but the Russell 2,000 is down more than 2%.

To highlight the big divergence between largecaps and smallcaps, we ran our decile analysis on the Russell 3,000 based on market cap. To run the analysis, we broke the Russell 3,000 -- which is made up of largecaps, midcaps and smallcaps and contains 98%+ of investible US stocks -- into deciles (10 groups of 300 stocks each) sorted from the largest cap stocks to the smallest and then calculated the average performance of the stocks in each decile since the close on 10/24.

As shown below, the decile of the largest stocks in the Russell 3,000 has actually averaged a gain of 0.07% since 10/24, but the gains stop there. Performance gets worse and worse as you move down the scale towards smaller caps until you get to the last decile, which contains the 300 smallest stocks in the index. As shown, the average change of this decile since 10/24 has been -4.8%, which is a pretty significant pullback.

Given their big year-to-date gains up until the last week, it's not surprising to see smallcaps pull back a bit. The question now is whether or not this trend continues through the end of the year.

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