Along with the performance context on a historical basis, Goodwin notes a number of additional supporting factors that may keep US small caps going.
“While some investors are concerned about potentially high valuations for US small caps in this extended bull market for US stocks, the current price-to-book ratio for the Russell 2000 Index is nowhere near its all-time high. In addition, implied volatility for US small caps as measured by the CBOE Russell 2000 Volatility IndexSM is at its lowest point since the Index was launched in 2004,” Goodwin added.
When looking at the price-to-earnings ratio and also accounting for inflation, the Russell 2000 is actually trading below its historical mean but still well within its historical one-standard-deviation band.
A high expected volatility would be a signal for hurdles to come, but the current CBOE Russell 2000 Volatility Index shows forward looking options are currently hovering near historically low levels or are reflecting a relatively subdued volatility outlook.
For more information on the small-capitalization market, visit our small-cap category.