Small Caps Struggle in Record-High Drought

MARKET BLOG

Stock markets around the world have hit new record highs this year, but U.S. small cap stocks have yet to join the party.

As shown in the LPL Chart of the Day, the S&P 500 Index has outpaced the Russell 2000 Index, its small cap counterpart, over the past year.

Small-Caps-Lag-In-Latest-Rally

That divergence has become especially apparent lately as the Russell 2000 has struggled to notch its first record high since August 2018. For context, the S&P 500 has posted 42 record highs since then, and the Dow Jones Industrial Average has reached 32 record highs.

Small caps were within 2% of an all-time high on January 16, but the recent worries around a dangerous viral outbreak in China have weighed on risk assets this week.

It’s no surprise to us that small cap stocks have lagged over the past few months, as both fundamentals and global developments have worked against smaller cap stocks recently. Small cap stocks’ revenue has been more exposed to domestic factors, so they’ve historically benefited from a rising U.S. dollar. Large cap stocks have flourished amid easing global trade tensions, and the global recovery has suggested the dollar may weaken in the months ahead.

“Small caps may eventually reach that coveted record-high status, but we think it’s unlikely they’ll pull ahead meaningfully this year,” said LPL Financial Chief Investment Strategist John Lynch. “While we’d like to see broad market participation, we suspect large caps may have to carry gains going forward.”

Overall, we still favor a balance of growth and value styles, and emphasize large cap stocks over small cap stocks in appropriate strategies as the business cycle moves into its latter stages.

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Please read the full Outlook 2020: Bringing Markets Into Focus publication for additional description and disclosure.

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