The Small Caps/Russell 2000 Hot Streak Is About to Fade
(1 min read)
In early November, we argued that US small caps as expressed through the Russell 2000 index (RTY) should start to outperform. The index was still six points underwater compared with the start of 2020, while the S&P 500 (SPX) was up on the year. We thought, with the economy reopening and the prospect of vaccines on the horizon, small caps should perform well. Indeed, they have. The RTY index has surged 33% since then, far outperforming the SPX (+15.5%) and NASDAQ 100 (+18.2%). But going forward, if history is a guide, the RTY index will no longer outperform and will be much closer to a market performer.
Over the last 35 years, the RTY index has tracked the large-cap SPX index closely (Chart 1). It tends to underperform in recessions and big market selloffs, then recover sharply. After the initial rally, it tends to track or modestly outperform the SPX.
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