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Will the Small Cap Surge Continue?

Todd Bunton

The year-to-date returns among small and large cap stocks were pretty much the same through June. In fact, as late as June 26, the Dow Jones Industrial Average (which I'll use as a large cap proxy) was actually beating the Russell 2000 (small cap proxy) by a small margin.

But small cap stocks have been on fire lately. Since June 26, the Russell 2000 has surged an additional 15.4% while the Dow has only inched up 3.2%, as of the close on October 21. Year-to-date, the Russell 2000 is now up 31.0% versus the Dow Jones' 17.5% return.

You can see the remarkable break away in small caps in this chart:

This looks like typical "risk on" behavior, where investors rotate out of relatively "boring" and "safe" stocks (like many of the blue chips in the Dow) and into higher beta, higher growth stocks (like many in the Russell 2000). But a "risk on" shift is usually sparked by some sort of catalyst. My question is this:

What do you think is the catalyst behind this move?

Have large systemic risks mitigated since late June? Are investors suddenly expecting a positive turn in our Muddle Through economy? Or is it something else?

Perhaps more importantly: do you think the recent outperformance of small cap stocks will continue throughout the rest of the year? Or will they cool off as investors shift back into safer stocks?

Chime in below and join the conversation!

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