The last time the Russell 2000 RUT hit a new high was in March of this year, peaking at just over 2,360 points, while the S&P 500 GSPC continues to break new highs. According to DataTrek Research, however, there are two factors that determine whether the Russell 2000 can outperform the S&P.
Colas referenced a chart depicting high yield spreads back to 2006, noting that almost all times when the Russell 2000 outperformed the S&P 500 came when high yield spreads were tightening noticeably. The only exception is 2008, when Colas outperformed by only dropping 34 percent to the S&P s 37 percent decline, Russell said. It was modestly helpful to have less large cap financial exposure during the financial crisis, of course. The second factor, according to Colas, pertains to Russell 2000 s heavy overweight on health-care companies. He said that the issue lies in the fact that large-cap health care has not generated much momentum in contrast to small-cap health care over the past year.
The index has a 19.6 percent allocation to the health-care sector versus 12.3 pct in the S&P 500, Colas added. Small cap Health Care using the S&P 600 SP 600 sector as proxy has been going nowhere this year, only up 4.5 pct YTD and losing steam as the year progresses. That s something of a surprise, since large cap Health Care a group we like is up 15.9 pct and moving up with the recent rally in large caps. DataTrek will continue to remain neutral on U.S. small caps. They last upgraded this rating from Neutral to Negative in late July. However, according to Colas, DataTrek views the small cap energy sector favorably, pointing at the Invesco S&P SmallCap Energy ETF PSCE Ultimately, he believes it may be difficult at the moment to be enthusiastic about the Russell 2000 given lackluster performance in small cap healthcare and high yield corporate spreads tight to treasuries.
And maybe small cap Health Care can find its footing, but check out the chart for PSCH PSCH S&P 600 Health Care and you ll see that s a hard ask, Colas said. We continue to like Small Cap Energy PSCE but aside from that we remain at best neutral on US small caps.