What a difference a year makes. This time last year there were a lot of long faces in the mass media telling the public at large how bad market conditions were and making comparisons to 2008. As is typical, they had some of the facts wrong, but headline news must be provocative.
For sure, last December was not fun for investors, especially when it came to smaller names. The Russell 2000 Index (down 11.9%) and Russell Microcap Index (down 12.1%) cratered during that month and were in worse shape for the fourth quarter, down 20.2% and 22.1%, respectively. This year's recovery looks fairly solid; for the year to date, the Russell 2000 is up 25.7% and the Russell Microcap is up 21.7%. That performance is not in the same league as the S&P 500 (up 31.1%) and Russell 1000 (up 31%), but looks good nonetheless.
That is until you widen the time frame. Go back to the beginning of last year's fourth quarter and you'll find that the Russell 2000 is flat (up a mere 0.24%) and Russell Microcap is down 4.3%. Go back exactly two years and you'll find these indexes up just 5.75% and 3%, respectively; keep in mind those are cumulative returns and not annualized returns.
In general terms, smaller names have not been participating in the rally to the extent that their larger cousins have. Indeed, the performance of Russell's large-cap index, the Russell 1000, is better than that of the Russell 2000 and Russell Microcap indices in all cumulative annual return periods for the past 10 years. Over the past three years, for instance, the Russell 1000 (up 14.4% annualized) is absolutely trouncing the Russell 2000 (up 8%) and Russell Micro (up 5.6%).
We are seeing smaller names come to life a bit this quarter; quarter to date, both the Russell 2000 (up 10.1%) and Russell Micro (up 12.8%) are ahead of the Russell 1000 (up 8.7%), but that's a drop in the bucket at this point.
Perhaps this quarter's performance will carry over into 2020; hope springs eternal. Historically, smaller names have been more volatile than large-caps, providing a premium in order to account for increased risk. In a crisis, they typically suffer a worse fate than larger names as investors sell them first. However, in recent years, investors have not been receiving that premium. Whether that's the new normal or just a phase remains to seen, but I'd go with the latter.