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What Follows Negative First-Quarter Returns for the Russell 2000? Subsequent 12-Month Returns for the Russell 2000 Following Negative First Quarter Performances as of 3/31/22 Since Inception (12/31/78) As welcome as that kind of return would be, we don’t think that level of performance looks likely over the next year. The Russell 2000 posted positive returns in 93% of the subsequent 12-month periods-while averaging a 32.7% return. Interestingly, the subsequent 12-month periods following these negative opening quarters have been very positive for small-cap stocks. Since the inception of the Russell 2000 in 1979, most first quarters have had positive returns. What has the Russell 2000’s history been for the 12 months following negative first-quarter performances?įG It’s been mostly good news after a bad calendar quarter to start the year. These next two earnings seasons should give investors a chance to recognize the solid underlying fundamentals that we see. So, in spite of some very solid to impressive earnings growth over the last year for many small-cap companies, it appears that most investors have yet to recognize some of the fundamental strengths and/or growth prospects that we see in many small-cap companies. We think this will change when these companies report quarterly earnings mostly in May and again in August. But the small-cap index was down 5.8% for the one-year period ended 3/31/22. What does the negative return for the Russell 2000 over the last year suggest for returns going forward?įG First, it’s fairly typical that most of the commentary around stocks focuses on large-caps, so the fact that the Russell 2000 has been trending downward for the last year has mostly flown under the radar. I’ve learned that the best course of action is to accept where we are and try to plant seeds that ultimately bear fruit for our investors. None of us can predict surges in volatility. This is one of the occupational hazards, as it were, of being a small-cap specialist-though it’s one that we consistently try to use to our long-term advantage by buying companies when their prices fall to what we think are attractively low levels. When we see these kinds of rapid, widespread market declines, small-caps usually drop more than mid-caps, which lose more than large-caps. stock index dropped by 5% or more in January, mostly in the space of just a few weeks. Was the underperformance for the Russell 2000 versus the Russell 1000 in 1Q22 also not surprising?ĬR It wasn’t a surprise to me. We think this speaks to both the resilience of small-cap value during challenging periods and what we continue to see as a long-term outperformance phase for value within small-cap.
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As awful as the war is, it seems so far to be having a minimal effect on small-cap performance.įrank Gannon To build on Chuck’s point about the first quarter having extended existing trends, I think it’s also important to mention that the quarter resembled calendar 2021 in that not only did the Russell 2000 Value Index do better within small-cap, down 2.4% versus a loss of 7.5% for the Russell 2000 Index, but it beat large-cap as well-the Russell 1000 Index was down 5.1% in 1Q22. However, we think many investors would be surprised to know that small-caps bottomed a month before the invasion began and posted positive returns in both February and March. Of course, we should also mention the intensified uncertainty that the Russian invasion of Ukraine has inserted into an already volatile economic and market setting. Small-cap growth has also endured sector-specific challenges in its highest weighted areas, namely Information Technology, Health Care, and Consumer Discretionary. Rising rates also tend to hit the highest valuation stocks hardest-which is precisely what we’ve been seeing with small-cap growth stocks. With all of the focus on increasing inflation and rising rates, we think it’s helpful to recall that these developments often accompany robust nominal economic growth, which has historically benefited small-cap value stocks. Based on history, the current market environment is providing multiple reasons for value to hold up better than other styles going forward. For more than a year now, small-cap investors have experienced very different outcomes depending on whether they leaned more towards value or growth stocks. Were you surprised by how well small-cap value held up during the volatile first quarter?Ĭhuck Royce Not at all.