A Small Company Story
Is it possible the U.S. experienced an extremely odd if not unique economic expansion among its largest companies while simultaneously smaller companies suffered a recession?
It’s been a tough bull market for small company stocks. As shown in chart 1, the current decade started out okay. After a short but sharp pandemic bear market in 2020, small cap stocks significantly outpaced the tech-fueled S&P 500 index during the post-pandemic bull market ending in December 2021. That was the last time small cap stocks led over their larger cap brethren.
During the 2020 bull market, it wasn’t like small caps were only able to lead the venerable S&P 500 index because new-era tech darlings hadn’t yet gained immense popularity and leadership. They had! The technology sector weighting of the S&P 500 index rose from slightly less than 19% in February 2020 to more than 26% by the end of that bull in December 2021. And the Mag 7 index rose by nearly 277% during the post-pandemic bull market compared to only 113% for the overall S&P 500 index. Still, despite the S&P 500 index being led by technology and popular Mag 7 names, small caps nonetheless outperformed the overall S&P 500 during the 2020-21 bull market.
This all changed, though, after the 2022 bear market. Both the S&P 500 index and the Russell 2000 index suffered a bear market in 2022 – the S&P 500 dropped about 26% and the Russell Index fell by about 32%. But, as demonstrated in chart 1, since the 2022 bear market ended in October of that year, the large cap S&P 500 and the small cap Russell 2000 have parted company in a big and curious manner. From a bear market low in October 2022, the S&P 500 Index has risen by about 80% whereas the Russell 2000 Index is only up by about 32%. Indeed, the Russell small cap index has yet to surpass its 2021 bull market high whereas the S&P 500 is about 33% above its last bull market high.
True, the S&P 500 has been led by new-era technology and the Mag 7 names during the contemporary bull market. However, that was also true during the 2020-21 bull market when small cap stocks beat large caps. So, what is different since the end of the 2022 bear market which has caused such a seemingly never-ending and chronically widening divide between the S&P 500 and broader market plays like small cap stocks?
