SOURCE: Russell Investments

Russell Investments

December 10, 2015 12:44 ET

Getting a Rise out of Rates: FTSE Russell Historical Analysis Suggests Possible Short Term Bumps for US Small Caps

SEATTLE, WA--(Marketwired - Dec 10, 2015) - Since the FOMC issued its last policy statement on October 28, apparently opening the door to begin tightening US interest rates at its scheduled meeting next week, US small-cap stocks as measured by the Russell 2000® Index (+1.8%) have led US large cap stocks as measured by the Russell 1000® Index (+0.7%).

Historical analysis by global index leader FTSE Russell, however, suggests that the beginning of the of the Fed tightening process may see a bumpy road for small caps in the short-term, although past performance is no guarantee of future performance.

Analysis of the Russell 2000® Index during two prior periods of extended US rate tightening -- 1999-2000 & 2004-2006 -- shows US small caps trending downward initially in both periods, but showing longer-term increases.

 
Russell US Market Cap Index Performance During Extended US Rate Tightening, 1999-2006
     
FOMC Rate Activity   Russell 2000® Index After Beginning of Rate Increases   Russell 1000® Index After Beginning of Rate Increases
Beginning & End Dates for Tightening   One Month   Six Months   One Year   One Month   Six Months   One Year
June 30, 2004 - June 29, 2006   -6.2%   +11.8%   +10.1%   -3.0%   +8.4%   +8.4%
June 30, 1999 - May 16, 2000   -1.9%   +10.1%   +15.2%   -1.7%   +9.6%   +10.8%
                         

Source: FTSE Russell, data as of dates indicated. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

And, while growth-oriented US small-cap stocks as measured by the Russell 2000® Growth Index (+2.9%) have continued to outperform value-oriented US small-cap stocks as measured by the Russell 2000® Value Index (+0.7%) since October 28, historical small cap style analysis during the same two tightening periods proves less conclusive.

While the last two periods of extended Fed rate hikes saw bumpiness for US small cap stocks across both growth and value in the initial stages, value-oriented stocks clearly led the way in 2004. In 1999, the opposite held true, with growth-oriented small caps on a tear for the first year.

 
Russell US Small Cap Growth & Value Index Performance During Extended US Rate Tightening, 1999-2006
     
FOMC Rate Activity   Russell 2000® Growth Index After Beginning of Rate Increases   Russell 2000® Value Index After Beginning of Rate Increases
Beginning & End Dates for Tightening   One Month   Six Months   One Year   One Month   Six Months   One Year
June 30, 2004 - June 29, 2006   -8.4%   +9.2%   +5.0%   -4.0%   +14.2%   +15.1%
June 30, 1999 - May 16, 2000   -1.8%   +26.1%   +30.1%   -2.1%   -7.3%   -0.7%
                         

Source: FTSE Russell, data as of dates indicated. Past performance is no guarantee of future results. Please see the end for important legal disclosures.

Tom Goodwin, Senior Research Director, FTSE Russell:
"While past performance is no guarantee of future results, historical analysis through market indexes can help investors better understand the potential impact of market events, in this case a potential extended period of US interest rate tightening. None of us have a crystal ball, but the layered insight, of both market cap and style analysis, through our indexes can provide additional perspective to investors charting a plan of action."

This FTSE Russell Index IDEA draws from historical research authored by Tom Goodwin and other FTSE Russell index experts. More research and insights can be found on the new FTSE Russell blog.

About FTSE Russell:
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Views expressed by Tom Goodwin are based on information as of December 8, 2015 and subject to change.

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