Small caps stumble


After a rip-roaring rally late last year, small-cap stocks have hit a wall in 2017.

The Russell 2000, the benchmark small-cap stock market index, is up about just under 2% through March 20.

 

Bloomberg: Russell 2000

Bloomberg: Russell 2000

 

By comparison, the S&P 500 Index of blue chips has advanced 6%.

 

small-caps

 

 

Valuation Gap

What gives?

One potential issue for investors may be the widening valuation gap between small-cap and large-cap stocks.

The forward price-to-earnings ratio of the Russell 2000 is 25.4, according to Zacks Investment Research.

That’s the highest level since 2009 and well above a 10-year average of 20.7.

 

Performance Gap

Another way to analyze the divergence is to look at broader Russell 3000, which covers a bigger universe of stocks, both small, medium and large-cap companies.

Bespoke Investment Group generated an interesting chart by breaking up the Russell 3,000 into deciles (10 groups of 300 stocks each) based on market caps.

Take a look at the next chart, and it’s clear that large-caps are outperforming their smaller brethren.

 

Source: Bespoke Investment Group

Source: Bespoke Investment Group

 

Takeaway

The small-cap rally has cooled.

The overall market remains robust, but it’s being driven by blue chip.

For the moment, small-cap valuations are just too pricey for many investors.

Photo Credit: moonjazz via Flickr Creative Commons

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Xavier Brenner
Xavier Brenner
Xavier Brenner has covered global market, business and economic trends for Interactive Brokers Asset Management since 2013. An experienced financial journalist, Brenner offers analysis and insights on the stories that matter to the discerning investor.