Where have all the small caps gone?

It certainly feels like all the small cap stocks have had a terrible time of it.  Since the beginning of the year, the Russell 2000 Index fund (IWM) has gone down 3.5%.  The S&P 500 Index fund (SPY) has gone up 4% in the same period.What's going on here?  Is it due to some particular stock or set of stocks in the S&P 500 or in the small cap universe that are acting oddly?  If it were a particular set of stocks, then equal weighting the S&P 500 and picking a basket of small cap stock should kill the effect.  We plot the S&P equal weight (similar to RSP, but rebalancing weekly), along with smallcap(here 100M to 1B), and midcap(1B to 5B), and the picture doesn't change much (notice the clustering).

Notice that the smallcap and midcap lines underperform significantly, and the spy and S$P equal weights cluster together.  Also, it seems that the main divergence happens right around March 15th.  So, is being S&P something special?  Lets test this, by adding three lines: largecap (5B-25B), megacap (25B+), and S&P smallcap 600.  If being selected by Standards and Poors makes it special, then the S&P 600 collection should outperform.  If its purely Market Cap, then the mega and large should outperform…

 

Breaking it down by month, we have clear largecap months, and clear smallcap months.

 

 

And there we have it — 100% market cap driven.  The question of why, I leave to the reader to contemplate…..

 

About henry

Henry Crutcher is an avid family guy, board gamer (think Settlers of Catan, Puerto Rico, etc), computer nut, and all around geek. Hailing from Louisville, KY, he has noticed that the weather in Louisville is remarkably similar to the weather in Atlanta, GA despite the 407 miles that separate them. He has two daughters, one cat, and lots of trees. He loves the Miles Vorkosigan series from Lois McMaster Bujold, for its mix of SF, comedy and insight into how people work. He also comsumes more than his fair share of cheesy business/economics books, such as The Ascent of Money by Niall Ferguson, or Farewell to Alms, by Gregory Clark.

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