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Alternative Market Briefing

A dramatic rebound for small-caps, and the rally has room to run...

Wednesday, January 11, 2017

Matthias Knab, Opalesque:

Francis Gannon, Co-Chief Investment Officer, Managing Director of Royce Funds writes in Harvest Exchange:

2016 was a terrific year for small-cap stocks that included some key reversals: The Russell 2000 turned around 2015's negative result, value outperformed growth, and cyclicals beat defensives.

The Russell 2000 Index advanced 21.3% in 2016. This terrific result stood in stark contrast to 2015's negative return. It also reversed two years of underperformance versus large-cap, as the Russell 2000 handily outperformed the Russell 1000 (+12.1%) and S&P 500 (+12.0%) Indexes. Strength for the asset class extended through 4Q16 when the Russell 2000 was up 8.8% versus a gain of 3.8% for both the Russell 1000 and S&P 500 Indexes.

Despite small-cap's strong run in 2016, the Russell 2000 finished the year only 7.2% above its 6/23/15 peak. For additional context, it's worth noting that small-cap upswings usually extend well beyond the Russell 2000's 47.4% increase from its 2/11/16 trough through its interim peak on 12/9/16. There have been 12 declines of 15% or more for the Russell 2000 since its 1979 inception. The median return for the subsequent recovery period was 98.8%.

Our Outlook: Based on history, we see more running room for small-caps. The market and economic environments look promisin......................

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