Thursday's market action was more along the lines of what you might expect in a bear market. Smaller stocks were hit harder than larger names. With the S&P 500 down 0.84%, the Russell 2000 (down 2.26%) and Russell Microcap (down 2.08%) took the brunt of the damage. Still, year-to-date there is a relatively small performance difference between these three indexes:
- S&P 500: down 20.23%
- Russell 2000: down 22.57%
- Russell Microcap: down 23.73%
That's a bit surprising given what typically happens in down markets -- smaller stocks typically suffer to a much greater extent. Investors raising cash will tend to sell off their smaller, more speculative holdings first, and hold onto their higher-quality companies.
This can create intense selling pressure among the smaller names, driving these stocks into the ground, and for those with a very strong stomach, creating bargain opportunities. We have not seen that happen yet, to any great extent, which means that the fourth quarter could be very "exciting" if markets head further south.
We saw this quite a bit back in 2008/2009. Although I am not trying to draw comparisons between then and now, it is important to remember what happened.
You would see individual names hit so hard, that you knew they were bargains. Then three days later, they'd take another hit and so on and so on. It got to the point that you began to wonder if they could actually go to 0.
By the end of it, prices were so ridiculous for some securities, and a great deal of money was made as markets stabilized. But by then, some investors were traumatized.
That period was so psychologically damaging to some investors that more than 10 years later, I still came across folks that still had their 401(k)'s in cash.
The point is this: if you think you see an absolute bargain in this environment, especially among the smaller, less-established names, consider taking the intended position over time instead of going all in at once.
This does not appear to be the type of environment that it is wise to "back up the truck" and go all in. There is simply too much uncertainty at this point, and the rather small spread between the performance of large and small caps is concerning.
