Investors overlook the Russell 2000 index quite frequently, but the stock index is having its best start to a year since 1987. Currently, there are only a few stock analysts and financial journalists that cover this specific area in the stock market. This is a big reason why this index is often ignored.
Russell 2000 Index Up 12%
In 2018, the index saw its worst financial annual loss since the financial crisis. Now, small-cap stocks and the Russell 2000 are booming. At the time of writing, the index is seeing year-to-date growth of 12.04%. The Russell 2000 was established in 1984.
There are two ways of thinking about small-cap investing. It’s almost similar to the glass half empty or half full approach. There is hard evidence for both, but it just comes down to what you’re willing to risk.
Half Empty or Half Full
On one side, Russell 2000 companies have the capability of outperforming large-cap stocks over time. These companies often have more upside than larger companies due to their growth potential. All large-cap companies were once small cap, and if you can find that gem, it could mean big rewards.
“Small stocks should be included in any well-diversified portfolio,” says Justin Halverson, co-founder of Great Waters Financial, a Minneapolis-based financial planning firm. “The stocks of small companies inside and outside of the U.S. have generally performed better than the stocks of large companies over time.”
On the other side, Russell 2000 companies are typically more susceptible to economic cycles. In addition to this, these smaller companies typically hold more debt than larger cap companies, making them sensitive to wage inflation and rising rates.
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“Large caps typically outperform small caps late cycle,” Mark Tepper, Strategic Wealth Partners, told CNBC. “When the economy slows and eventually contracts, those companies with high debt levels are going to get hit the hardest. Cash flow slows, rates go up, and that’s a recipe for trouble. Beyond that, wages are going up, and that’s going to eat into margins.”
Whatever way you look at it, the Russell 2000 is performing surprisingly well in 2019. Like Halverson said above, a well-diversified portfolio often holds some small-cap stocks. If the index and small-cap companies continue to climb, they will surely receive more attention from Wall Street down the road.
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