SOURCE: Russell Investments

Russell Investments

October 23, 2013 12:10 ET

U.S. Small Cap Investors Appear to Shift to Defensive in October According to Russell Indexes, Bucking Year-to-Date Trend

SEATTLE, WA--(Marketwired - Oct 23, 2013) -  With the U.S. small cap stock market having reached all-time record highs, the U.S. small-cap Russell 2000® Defensive Index has outperformed the Russell 2000® Dynamic Index in the month of October (as of October 19). This represents a shift for U.S. small cap investors, as dynamic-oriented stocks, which are more sensitive to economic cycles, credit cycles and market volatility, outperformed defensive-oriented stocks in the first three quarters of this year. 

The U.S. large-cap Russell 1000® Index, on the other hand, began the year defensively, with defensive-oriented stocks outperforming dynamic-oriented stocks within the Index in the first half, but shifted to dynamic outperformance in the third quarter and October month-to-date.

"Politically driven market uncertainty in the U.S. -- resulting from the recent sequester, government shutdown and debt ceiling debate -- appears to have caused U.S. small-cap investors to lean into more defensive names in recent weeks. However, continued strong performance year-to-date for overall U.S. markets as reflected by the Russell 1000 and Russell 2000 Indexes may at least partly reflect continued positive-but-mixed economic and earnings data and the increased possibility that a Fed chair nominee (widely perceived as accommodative) will delay a Fed taper," said Stephen Wood, chief market strategist for Russell Investments.

Russell Index Oct. a/o 10/21 3rd Quarter First Half 2013 2013 YTD a/o 10/21
Russell 2000 Index 3.6% 10.2% 15.9% 32.3%
Russell 2000 Defensive Index 4.0% 9.4% 15.0% 30.8%
Russell 2000 Dynamic Index 3.3% 11.1% 16.7% 33.9%
Russell 1000 Index 3.8% 6.0% 13.9% 25.3%
Russell 1000 Defensive Index 3.2% 3.8% 14.6% 22.8%
Russell 1000 Dynamic Index 4.3% 8.2% 13.3% 27.9%

"U.S. small cap stocks can be more closely connected to U.S. market dynamics than large caps, with Russell 2000 Index companies generating approximately 84% of their revenue within the U.S., versus 70% U.S. revenue for Russell 1000 companies.* This may help explain the rotation by investors toward more stable, higher quality, defensive-oriented names in the Russell 2000 Index in recent weeks amid growing government dysfunction and uncertainty in the U.S. and improving economic and market sentiment internationally," said David Koenig, investment strategist for Russell Indexes.  

Source: Russell Investments. Returns are denominated in US dollars.

*FactSet, as of March 31, 2012. Based on each company's latest reported fiscal year.

Please note: Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Russell's publication of the Indexes or Index constituents in no way suggests or implies a representation or opinion by Russell as to the attractiveness of investing in a particular security. Inclusion of a security in an Index is not a promotion, sponsorship or endorsement of a security by Russell and Russell makes no representation, warranty or guarantee with respect to the performance of any security included in a Russell Index. 

Opinions expressed by Mr. Wood and Mr. Koenig reflect market performance and observations as of October 21, 2013 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance. 

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investment Group is a Washington, USA corporation, which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company.