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Index IDEA: Small Cap Stage Setting

Index IDEA: Small Cap Stage Setting - Predictive Power of Russell 2000® Index Lessens as the Year Progresses; FTSE Russell

With US stocks down sharply in the first trading week of 2016, including a 2.2% fall for the US small cap Russell 2000® Index in the first two trading days, FTSE Russell examined the last 20 years of US small cap market returns to see if early returns held any predictive sway over full-year returns.

Twenty years of market returns suggest that the predictive nature of small cap performance lessens as we get further into the year. In 70% (14 of 20) market years between 1996 and 2015, a positive first trading day for US small caps led to a positive full year, and vice versa. This direct positive and negative correlation decreases to 65% (13 of 20) for the first two trading days, 60% (12 of 20) for the month of January and to 40% (8 of 20) for the first quarter.

The following scatter chart plotting first trading day and full-year Russell 2000 Index returns over the last two decades helps graphically illustrate this relatively high correlation.

Tom Goodwin, Senior Research Director, FTSE Russell:

“While past performance is no guarantee of future results and US small cap market performance is inherently less predictable than other asset classes, historical analysis through market indexes can help investors identify potential patterns which may inform greater market understanding. None of us have a crystal ball, but objective analysis through market indexes can provide additional perspective to investors charting a plan of action.”

 

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Views expressed by Tom Goodwin are based on information as of January 7, 2016 and subject to change.

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