SOURCE: Russell Investments

Russell Investments

October 24, 2014 14:30 ET

U.S. Small Cap Stocks Have Staged a Comeback in October According to Russell 2000® Index - Short Term Bounce or Longer Term Trend?

SEATTLE, WA--(Marketwired - Oct 24, 2014) - U.S. small cap stocks, as reflected by the Russell 2000® Index, returned more than 4% in the eight trading days ended October 22 as compared to U.S. large cap stocks, as reflected by the Russell 1000® Index, which returned 1.4% in this time period. This narrowed a performance gap between the two indexes that had been widening in 2014.

And while the Russell 2000 is still down (-4.8%) in 2014 year-to-date as of October 22 relative to a +5.6% return for the Russell 1000, the Russell 2000 (-0.4%) has outperformed the Russell 1000 (-2.2%) by nearly two percentage points in a very volatile October-to-date as of October 22.

In addition, valuations have continued to come down for small caps in 2014. The 1 year forward price-to-earnings ratio for the Russell 2000, which stood at 19.6 on December 31 and 19.7 on June 30, was at 17.0 as of market close on October 22.

"The Russell 2000® Index has much greater exposure to companies deriving their revenue from the U.S. than U.S. large-cap indexes like the Russell 1000® Index, which contain more multinational companies. For this reason, the Index can be an indicator for the U.S. economy," said David Koenig, CFA, FRM, index investment strategist with Russell Investments. "And with a U.S. economy that continues to strengthen, continued solid U.S. corporate earnings and now more compressed valuations for U.S. small cap stocks, it is not surprising that investors appear to be coming back to this asset class."

Although she isn't convinced that the current phase of small cap underperformance vs. large cap is over just yet, Credit Suisse Small/Mid Cap US Equity Strategist Lori Calvasina observes that "from an asset allocation perspective we see more risk in the mid cap space and are more inclined to trim exposure there than in small cap."

Russell U.S. Index Returns
 
Russell Index   Oct 13-22, 2014   October MTD as of 10/22/2014   YTD 2014 as of 10/22/2014
Russell 2000® Index   4.2%   -0.4%   -4.8%
Russell 1000® Index   1.4%   -2.2%   5.6%

Source: Russell Investments. Returns are total returns (reflect reinvestment of dividends and distributions) and are denominated in U.S. dollars.

You can read more from David Koenig, Lori Calvasina and other small cap market experts in the recently introduced Russell Small Cap Compendium. You can find it on the Russell Indexes website.

The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

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 Ms. Calvasina and Mr. Koenig reflect market performance as of October 22, 2014 and are subject to change at any time based on market or other conditions without notice. Past performance does not guarantee future performance. 

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 an independent organization and is not affiliated with Credit Suisse.

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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.