Stock market investors watch what’s happening with major market benchmarks in order to get a sense of what’s happening in the overall economy. But it’s a mistake to think that every popular index does a good job of tracking the conditions Main Street in America faces right now.
That’s why, as much as investors follow the Dow Jones Industrial Average (DJINDICES:^DJI), the S&P 500 (SNPINDEX:^GSPC), and the Nasdaq Composite (NASDAQINDEX:^IXIC), looking more deeply can give you a better sense of what’s truly important to you in your daily life. In particular, those who ignore the U.S. small-cap benchmark Russell 2000 Index do so at their own peril, because although it’s not perfect, it does well in providing a picture of the smaller companies that are so important to economic prosperity.
Friday morning market update
The stock market pushed out to early gains on Friday morning, shrugging off nagging concerns about the COVID-19 pandemic. Health officials are increasingly concerned about the potential for unprecedented outbreaks of the disease as the onset of winter approaches, with some calling for closures of potential hotspots like restaurants and fitness centers. Yet with newly released earnings results having reflected the summer reopenings, investors are focusing on positive numbers that might prove overly optimistic if conditions deteriorate.
Just before 11:30 a.m. EST, the Dow was up 236 points to 29,316. The S&P climbed 27 points to 3,564, while the Nasdaq gained 59 points to 11,768.
How small-caps have struggled
Small-cap stocks outperformed the major benchmarks. The Russell climbed out to a 1.25% gain as of 11:30 a.m. EST, outpacing its large-cap peers.
Unfortunately, though, that hasn’t been the norm throughout most of 2020. Small-cap stocks got hit a lot harder during the February and March bear market than the Nasdaq or the S&P 500, as the Russell was down 40% from its highs at the worst of the market crash.
Since the March lows, small-cap stocks have held their own against their large-cap counterparts. However, because the Russell was coming off a lower base, its total return for 2020 year to date is well behind. The Russell’s 2% gain for the year trails the 10% jump in the S&P 500, and badly lags the Nasdaq’s year-to-date gains of more than 30%.
Can small-caps bounce back?
The reason most people give for small-caps’ underperformance hinges on their common characteristics. The biggest companies in the U.S. market have global scope, getting varying degrees of their overall business from international markets. Because those top companies have so much weight in major indexes like the S&P 500 and the Dow, their movements tend to reflect global conditions rather than the local business environment.
Small-cap stocks provide a reading of the U.S. economy that’s much closer to street level. It’s the closest thing that market participants get to being able to invest in the small businesses that drive so much economic activity across the nation. Small-cap performance has lagged in part because the current economic picture in the U.S. is cloudier than ever.
For the Russell 2000 and small-cap stocks to bounce back, there’ll need to be quick progress on a resolution to the COVID-19 crisis. Whether that comes from an effective and timely coronavirus vaccine or from a newfound sense of civic responsibility toward the health of others, controlling COVID-19 would be instrumental in ensuring that small businesses could keep operating.
For now, the stock market appears to be in a race against time. With millions of Americans having grown tired of coronavirus-related restrictions and seemingly given up on standard public health measures to fight the disease, an uncontrolled spread of COVID-19 could crush small-cap stocks just as they were starting to look more promising.