Will December bring glad tidings to small-company stocks?
Small-cap stocks have had quite the slog this year. Punished by rising interest rates and lingering fears of economic weakness, the Russell 2000 Index has struggled to a year-to-date return of just 4%.
Worse, compared to the tech-heavy (and overperforming) Nasdaq 100 Index, the Russell 2000 has recorded one of its poorest relative performances on record. The chart shows that the small-cap index has underperformed the Nasdaq 100 by 43% this year—the biggest gap since 1998 (when small-caps underperformed by 88%) and 1999 (-80%).
Small Caps Lag Tech Stocks By 43%
The good news: That extreme chasm could spell opportunity as we close out 2023. Given the likelihood that the Fed is done raising short-term rates and that long-term rates have peaked, investors’ attention may soon pivot away from all things tech toward small caps and their low valuations. The market’s tepid reaction to AI-darling Nvidia’s third-quarter results last week suggests such a shift might be underway.
Another potential positive for small caps is seasonality. Historically, December is the best month for small-cap relative performance. Over the past 30 years, the Russell 2000 Index has beaten the Nasdaq 100 by 1.7% on average during December.
Longer-term, small caps still face headwinds that concern us—such as greater sensitivity to interest rates, overall lower financial quality, and relatively little exposure to the AI trend—but in the remaining weeks of 2023, we believe good things may indeed come in small packages.
Disclosure
The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial companies listed on The NASDAQ Stock Market based on market capitalization. The Russell 2000® Index measures the performance of the small-cap segment of the US equity universe.
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