The market’s smaller stocks are down—and it may be time to pick some up.
While the S&P 500 index of large-company stocks saw a 10% drawdown earlier this month, the S&P 1000 index of small- and mid-cap equities suffered an even greater peak-to-trough 16.4% decline.
The good news: When the broader market takes a hit, it has often been the small- and mid-cap stocks that staged the biggest recoveries. The chart below displays the average drawdown and the average return one year later for both indices, based on all peak-to-trough declines greater than 10% for the S&P 500 since the end of 1994.
Some key takeaways:
- Note that the S&P 1000 has a slightly smaller average drawdown than the S&P 500. Smaller stocks might not be as risky as some investors think.
- In the year following these drawdowns, small- and mid-caps have outperformed large-caps by 6.1 percentage points (37.6% versus 31.5%) on average.
Average Returns of Large- and Small/Mid-Cap Stocks During Large-Cap Drawdowns and One Year Later
Of course, we don’t know with certainty how any of these asset classes will perform in the future. It’s encouraging that recent comments from the Federal Reserve Board did not mention future interest rate hikes, which would likely be beneficial for small- and mid-cap stocks due to their reliance on short-term debt financing.
Ultimately, we think smaller-company stocks’ 16.4% drawdown this year may signal an opportunity for patient investors to get positioned for a potentially strong upswing.
By Mike Dickson, Ph.D.
Originally published on Horizon Investments
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The S&P 1000® Index combines the S&P MidCap 400® and the S&P SmallCap 600® to form an investable benchmark for the mid- to small-cap segment of the U.S. equity market. The Standard and Poor’s 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. Indices are unmanaged and do not have fees or expense charges, both of which would lower returns. It is not possible to invest directly in an index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.
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