Must-read: It’s not easy being small (caps, that is) (Part 1 of 2)
The Russell 2000 – the most widely used benchmark for small-cap stocks (IWM) – is down approximately 2% for the year, while the S&P 500 (IVV) has gained more than 7%. That is a staggering 9% spread in a little over half of the year.
Typically, small-cap stocks (IJR) track large (IVV) and mid-cap stocks (MDY), with small-cap (IWM) stocks outperforming in most bull markets. According to Hedgeable’s proprietary analysis, small-caps are now in a draw-down of more than (-6%) for the year. Most analysts only look at the performance and year-to-date return of a security, but a current draw-down number tells a much bigger and more powerful story. A market can be net positive for a given time period, yet still experience very painful and return-draining draw-downs.
Market Realist – The graph above shows you the draw-downs in the Russell 2000 index for the past three years. There have been significant draw-downs in 2014 of more than 6%, which can be painful for the index.
Recently, small cap stocks have slowed significantly to the broader market indices like the S&P 500 (SPY), Dow Jones (DIA), and NASDAQ (QQQ). Analysts consider small cap stocks to have entered the year highly overvalued compared to the S&P 500 (SPY). These stocks have taken a beating since.
Read on to the next part of this series to learn more about the divergence between the S&P 500 and Russell 2000 and whether this is cause for concern.
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