The small-cap Russell 2000 index has outperformed the major indices recently and this has caught the attention of Wall Street, according to a recent Yahoo Finance article.
It asserts that small-cap companies, which generally have market capitalizations of less than $2 billion, tend to be less affected by US currency fluctuations than larger-cap companies, as these smaller firms are more likely to do business in the US rather than overseas.
The Russell 2000 dropped sharply from mid-August to early October but didn't break down through its June low, unlike the major averages.
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In fact, the Russell bottomed on September 26, days ahead of the Dow and two weeks ahead of the lagging Nasdaq, which shouldn’t be surprising considering that growth stocks are more volatile and smaller-cap stocks have historically performed worse during a broad-based stock market downturn.
“Small-caps have outperformed large-caps coming out of recessions 6 out of the last 6 times (all that we have data for),” Liz Young, head of investment strategy at SoFi, mentioned in a recent tweet.
The Russell 2000 index, which was launched in 1984 by the Frank Russell Company and is now managed by FTSE Russell, is a market index comprised of 2,000 small-cap companies.
The index is frequently used as a benchmark for measuring the performance of small-cap mutual funds and many investors see the index's breadth as giving it an edge over narrower indexes of small-cap stocks, according to Investopedia.
As of 1Q 2022, the index's top three holdings were Ovintiv, Avis Budget Group (NASDAQ:CAR), and Antero Resources. It is heavily weighted in financials, followed by industrials and health care.
The Yahoo Finance article concludes by saying until larger cap stocks stop making lower lows, small caps are looking like the better play and have the potential to lead the general market higher.
Contact Sean at sean@proactiveinvestors.com