|Small-cap stocks, as gauged by the Russell 2000 index, are off to their best start to any year in the past 32 years, boasting a
gain of 8.8% over the past 12 trading sessions, according to Dow Jones Market Data. That’s outpacing the large-cap S&P
500 the U.S. stock-market benchmark, which is up 5.2% over the same stretch — a performance, however, that likewise is
the strongest 12-day start to a calendar year in 32 years.
The Dow Jones Industrial Average is up 4.5% over the same period, while the Nasdaq Composite Index has logged a 6.8%
Is it a reason to cheer? Perhaps it would be if not for the fact that the gains are the strongest since 1987, when the Russell
popped 11.87% over the first 12 trading days and the S&P rallied 11.22%. 1987 is a year that lives in infamy on Wall
On Oct. 19, 1987, the Dow sank 22.6% in a single session, marking its steepest percentage drop ever. That is not at all to
suggest that similar action will play out this time around.
However, a number of strategists have been warning that gains in small caps aren’t likely to be lasting. MarketWatch’s
Chris Matthews writes that investors have been drawn to the relative bargains that small-cap stocks are trading at compared
with their larger-cap brethren, but noted that analysts are advising caution in investing in the group.
Separately, MarketWatch’s Barbara Kollmeyer, citing Andrew Lapthorne, a quantitative analyst at Société Générale, warns
that U.S. small caps will be in the center of the next storm for stocks because those companies tend to carry larger debt
loads relative to their heftier peers and are sensitive to rising interest rates.
“U.S. small caps have been taking on a massive amount of leverage over the past few years,” particularly starting in 2013
during the [quantitative easing] years, wrote Lapthorne.
Although the Federal Reserve appears to be in pause mode, the central bank does want to eventually normalize interest-rate
policy, which may add more friction for small-cap names.
Back in 2018, shares of those companies enjoyed a bounce because they were perceived as being more resilient than larger
multinational companies amid trade disputes between the U.S. and its trade partners, namely China. However, after
punching higher, that rally faded hard and fast as a resolution between Beijing and Washington failed to materialize.
Investors should hope that the same narrative, or an uglier one, doesn’t play out this year.