Small Cap Stocks have a Federal Reserve Problem

It seems likely that before too long, the primary challenge faced by small cap stocks – it’s Fed problem – will likely become a tailwind of support.

Small cap investors have been in purgatory or hell for most of the last two decades. Chart 1 shows the relative price of the small cap Russell 2000 stock index relative to the large cap S&P 500 index since 2000. Since March 2006, smalls have either been market performers or have significantly underperformed. Moreover, from its relative price high in September 2013, with only a couple brief exceptions, the R2000 Index has chronically and dramatically underperformed during the last 13 years. And currently, the relative price of the R2000 is the same today as it was a quarter century ago at the top of the dotcom era in 2000! That’s a long time to wait for some outperformance.