It took more than nine months, but the small-company Russell 2000 is finally at fresh 2014 highs, but the small-cap space has still been a big laggard this year. Is it a sign of better times ahead in 2015?
Despite making a new 2014 closing high of 1215.21 on Friday (its first since March) — and notching a fresh intraday record of 1220.81 today — the Russell 2000 headed in to today’s trading session up just 4.4% for the year. While a gain is a gain, the performance of the small-company stock index is a far cry from the 15.1% gain for the Nasdaq composite, the 13% gain for the large-company Standard & Poor’s 500 stock index and the nearly 9% gain for the Dow Jones industrial average.
Still, the Russell 2000’s late-year rally has been impressive and speaks to the current strong state of the overall U.S. stock market. It also could be a sign of a return of small-cap outperformance in 2015.
Part of the problem for the small-cap stock space this year has been its elevated valuations, relative to large-company stocks. The Russell 2000 is trading at 21 times its past 12-month earnings, vs. a price-to-earnings multiple of roughly 17 for the large-company S&P 500-stock index, according to Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking. “That’s a lofty P-E,” he says, and a big reason why he thinks small-company stocks, which had been the leaders of the bull market since it began back in March 2009, will likely lag the performance of big-cap names again in 2015.
“Small caps are still challenged from a valuation standpoint,” says Clemons, noting that comments earlier this year to the same effect from Federal Reserve chair Janet Yellen took some of the air out of small-company stocks. “Yellen referred to small caps as overvalued and investors pay a lot of attention to what the Fed says.”