“The ‘small cap premium’ can be an effective way to measure investors’ perceptions of the volatility of US large cap stocks relative to US small cap stocks,” Russell Rhoads, CFA, director, product advancement, Cboe global markets, said in a note. “On average, small caps are historically more volatile than large caps, but this relative measure has been known to ebb and flow from year-to-year since we began measuring this important statistic in 2004. At 10.3% year-to-date, we are seeing a huge outlier for the ‘small cap premium’ and certainly a reflection of the market conditions we have seen so far this year.”
What’s Driving Small Cap Momentum
Observers have pointed to a number of reasons for the increasing momentum in the small-caps, compared to their larger peers. For instance, geopolitical risks, a stronger U.S. dollar and rising trade tensions have contributed to a murkier outlook for large multinational companies, whereas small-caps have benefited from deregulation and ongoing domestic growth.
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“With many of 2018’s equity headwinds being international in nature, the Russell 2000 Index has outperformed the Russell 1000 Index due in large part to small caps’ lower international sales exposure,” Alec Young – managing director, global markets research, FTSE Russell, said in a note. “Being more domestic has insulated small caps from trade tensions, geopolitical worries and the earnings drag stemming from a stronger dollar. Being less global also gives small caps more exposure to several positives within the US, including tax reform, increasing deregulation and faster economic growth relative to weaker recoveries in Europe and Japan. All these tailwinds are helping drive faster profit growth for small cap companies relative to their blue chip counterparts, helping fuel YTD leadership while tempering relative volatility for this asset class.”
For more information on small-capitalization stocks, visit our small-cap category.