Small-Caps Lead the Way

July 25, 2013

The chart above illustrates the year to date outperformance of small-cap stocks (Russell 2000) versus large-cap stocks (Russell 1000). Year to date, small-cap and large-cap stocks have returned 24.8% and 20.3%, respectively. While both indices have largely been positive throughout the year, small-caps have outperformed substantially since June 24th as the stock market has come to grips with a higher interest rate environment, as an increase in Treasury yields has diminished the appeal of large-cap dividend paying stocks. Investors may be willing to take on additional risk and rotate into small-caps, in search of returns via capital appreciation rather than income growth. Additionally, with the prolonged difficulties in international markets, investors may also find small-caps attractive since a smaller portion of their sales are derived from overseas. As a percentage of total revenue, the Russell 1000 derives approximately 34% of their sales overseas, while the Russell 2000 only around 18%. Finally, as corporations sit on large piles of cash, debt is relatively cheap and organic growth remains difficult, we may see continued activity in the mergers and acquisitions markets that should benefit small-cap stocks. These factors may help explain the recent outperformance.