Index IDEA: Small-Cap Pullback?

by: FTSE Russell

While December thus far has seen a pull back for U.S. small cap stocks as evidenced by a 1.5% decline for the U.S. small cap Russell 2000® Index, researchers at FTSE Russell recently gave investors reason for optimism.

FTSE Russell senior index research director Tom Goodwin provided research on U.S. small caps, putting the asset class in current and historical context to help investors focus on the big picture.

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"The Russell 2000 Index has a return of nearly 27% since the U.S. presidential election last November, outperforming other major U.S. cap tiers," said Goodwin. "And this is without the benefit of the new administration having passed any significant new legislation."

Goodwin also examined small cap cycles - both up and down - since 1978 to place the current Russell 2000 Index uptrend of 31% (annualized) and 63.5% (absolute) in 464 trading days since February 11, 2016 in historical context. "The 11 small cap up cycles since 1978 saw a median return of 106.8% over a median period of 698 trading days," said Goodwin. "This suggests there is still room on the upside for the index."

Watch the vital signs

In addition to the performance context, Goodwin cites a number of additional supporting stats for U.S. small caps. "While some investors are concerned about potentially high valuations for U.S. small caps in this extended bull market for U.S. stocks, the current price-to-book ratio for the Russell 2000 Index is nowhere near its all-time high. In addition, implied volatility for U.S. small caps as measured by the CBOE Russell 2000 Volatility IndexSM is at its lowest point since the Index was launched in 2004."

Source: FTSE Russell. Data as of December 11, 2017. Past performance is no guarantee of future results.

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