As of Friday morning, the small-cap index has climbed 5.4 percent, compared to a meager 2.7 percent gain for the S&P. That said, this follows a period of substantial outperformance for the large caps. The S&P 500 rose more than 13 percent in 2014, while the Russell was up less than 5 percent.
“I think part of this is just mean reversion, because the Russell has lagged so far for so long that it’s natural just to catch up,” said Boris Schlossberg, a currency strategist at BK Asset Management, in an interview with CNBC’s “Trading Nation.”
“A lot of the flows that supported the big-cap stocks, like dividend chasing, has kind of priced almost all of the value out of the larger stocks, so investors are now looking for lower-priced stocks in the Russell 2000.”
But it’s not just that investors are springing for the last available assets. Schlossberg says the surge in small caps could also reflect a bullish economic thesis.
“The idea here is that the U.S. economy is going to finally start to really accelerate growth, which definitely favors small-cap stocks going forward,” the strategist said.
A similar point was made by Raymond James’ chief investment strategist, Jeff Saut, in a Thursday note, “The RUT [as the Russell is known to traders] is composed mainly of growth stocks and if the equity markets were about to turn nasty, the growth stocks would not be acting so perky.”
However, Gina Sanchez of Chantico Global says the small-cap rally is more a function of investors taking cover from the weakening global economic picture.
“I think the biggest driver has been that small-cap stocks are not as exposed to global sales whereas for the S&P 500, you’re looking at over 40 percent of sales coming from global sales. And we are seeing an incredible weakness round the globe. And so that makes small-cap stocks a lot more protected from that lagging global story,” she said, also in an interview with “Trading Nation.”
That feature of the small-caps is “going to keep pushing small-cap stocks up,” Sanchez added.
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