Investment Articles

01/27/05 - David and Goliath: Will Small Cap Stocks Make It Seven In a Row?

By: Richard Feldman, CFP, AIF, MBA

Institutional Investors and many Wall Street analysts didn't think it would happen again in 2004 but it did.  Small Cap stocks outperformed large cap stocks in 2004 making it the sixth straight year that small stocks have outperformed large stocks.  The Russell 2000® ended 2004 at an all time high with the index up 18.3% versus large cap stocks that were up 11.3%.  There is a lot of talk by analysts that small cap stocks run of out performance is over and that large cap will finally lead the way in 2005.  I have seen many reports recommending rotating out of your small cap holdings and into mega cap stocks that will be able to cope better with higher interest rates and so far in relative performance they have been right with the Russell 2000 down -5.34% and the S&P 500 down -3.1% but three weeks does not make a trend.  So what will the rest of the year bring?

Russell 2000

The Russell 2000 is one of 21 U.S. equity Russell Indexes and is used to measure the performance of small capitalization equities or small cap stocks.  The Russell 2000 is made up of the 2000 smallest companies in Russell's main index which is the Russell 3000.  The Russell 3000 is a broad based index that represents approximately 98% of the value of the investable U.S. equity market.  The index leaves out the tiny micro cap segment which makes up the remaining 2%.  The Russell 2000 makes up only about 8% of the total market capitalization of the Russell 3000.  According to the Russell website, the average market capitalization for a stock in the Russell 2000 is 1 Billion dollars and the Median Market cap is 561 million.  The largest stock in the index is 3.6 billion which pales in comparison to the average market capitalization of a stock in the S&P 500 which is 92 Billion.

Small Cap Stock Performance:

The Russell 2000 over the past six years has had an 8.92% annualized rate of return versus 1.25% for the S&P 500 significantly outpacing large cap stocks.  To follow are the results for the past six years:

Russell 2000      S&P 500
Year            Index                   Index

1999	21.26	21.03
2000	-3.03	-9.1
2001	2.49	-11.88
2002	-20.48	-22.11
2003	47.25	28.69
2004	18.32	10.87

Since 1979 small cap stocks as measured by the Russell 2000 index and large cap stocks as measured by the S&P 500 have had similar performance.

SUMMARY  STATISTICS
Jan 1979 - Dec 2004
Annual
	Russell 2000	S&P 500
	Index	Index
Annualized Return	13.46	13.72
Total Return	2565	2727
Growth Of $1	26.65	28.27

 

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