I don't remember signing up for the update emails, but I receive in my email inbox every morning a news brief on the performance of (IWM) , the ETF tracking the Russell 2000. This morning I was interrupted at 10:56 by an email noting that the IWM was down more than 2% today. The performance of IWM is not a huge driver of the value of my portfolio, but I am always interested in out-of-the-range data, and the Russell has been full of such readings lately.
Why is that? Well, it is easy to scoff and say "small stocks", and many market observers are guilty of just such a dismissal of the Russell and its predictive impact on the broader stock market and the broader economy. But the historical perspective has shown the IWM to be a leading indicator, not a coincident or lagging one, of the return of the larger U.S. equity indexes. If everything is go, go, go for the Nasdaq and its MAFANG leadership names, why isn't that also the case for the Russell?
To be fair, the Russell has posted a five-year average gain of 4.29% and a 10-year measure of 10.51%, so it hasn't exactly been dead money. The issue is the last year's performance, however, with the IWM's -6.65% performance in the past 12 months sticking out like a sore thumb against that of the big cap tech stocks, which are leading the day, just as they did at the did at the end of the last century. Is the performance of the Russell currently as relevant as it has been historically?
Of course it is. Capital will always flow to those companies that are innovating and growing faster than the overall economy. That is, was and always will be the case. Covid-19 won't change that. In fact, a quick look at the Russell 2000/IWM factsheet shows that the largest single issue in IWM is currently Novavax (NVAX) . The performance of the small-stock universe begins with a Covid vaccine play, but as Novavax is only 0.49% of the current weighting of the Russell, clearly there is a lot more there there than just a few vaccine plays.
What is driving the performance of the other 99.5% of the Russell? Our two old friends, fear and greed. The Russell, as tracked by IWM, is always going to measure those two Titanic influences. It is only when the test of the market forgets those two -- as is the case currently with the safety-in-numbers MAFANG trade -- that market participants collectively need to focus on Russell returns as a return to sanity.
Small stocks are telling you that there is much more systemic risk facing the U.S.economy than would be indicated by a reading of the price performance of the MAFANG titans. I am much more interested in the performance of a broadly-based, diverse group of stocks as a barometer of the U.S economy than a bunch of panting "faux-analyses" from stock promoters who can't read a balance sheet.
Listen to those who are telling you to listen to the Russell. The performance of IWM is telling you that all is NOT well in the overall U.S. economy. Bottom line: Bookmark IWM and use the small-stocks in the index to guide your asset allocation as we head into the election season this fall. You will not regret it.
