Keeping an Eye on the Tide
Destra Capital
The cliff divers at La Quebrada Cliffs in Acapulco, dive 134 feet into a narrow rocky inlet where the waves swell to a depth of only 14 feet for roughly 5 seconds.
They dive when they see rocks knowing that the water will wash in during the time it takes them to descend. If they dive when the water is at its peak, it will sweep out again while they are on the way down and they will hit the rocks instead of the water.
Keeping an eye on the tide matters to the cliff divers, as it does to investors. One such place where tides have receded dramatically are small cap securities.
Driven by a variety of concerns such as supply chain disruptions, fears that profits may have peaked, a Fed hawkish pivot, and geopolitical flareups, small cap securities (as measured by the Russell 2000 TR Index) peaked on November 8th, 2021 and continued their retreat through 2021 year-end and into the New Year. The Russell 2000 TR index crossed into Bear market territory on January 27th, 2022. Markets continued lower in early 2022 and as of this writing (May 24th, 2022), small caps hit a relative bottom on May 11, 2022. From the November 2021 peak through May 11, 2022 market close, small caps were down -29.08%.
Can Small Caps Claw The Way Out of Bear Markets?
This recent drawdown marks the eighth Bear market for small cap securities over the last two decades. The below chart outlines these 8 small cap Bear market time periods and compares the recovery performance between the S&P500 and Russell 2000 from each respective Bear market trough date.
Forward extending performance represents the forward extending returns for the labeled time period from the date noted as the trough. Note: the Peak and Trough time periods are returns from market open to market close on the trough date. N/a represents forward extending performance that has yet to be completed. Source: Morningstar Direct
The performance data quote represents past performance. Past performance is no guarantee of future results. Investors cannot invest directly in an index and index returns do not reflect any fees, expenses or sales charges directly in an index.
As seen from the chart above, in most, but not all time periods, small cap stocks (as measured by the Russell 2000 TR index) experienced higher drawdown recovery performance returns than large cap stocks (as measured by the S&P500 TR Index).
We understand that past performance is no guarantee of future results, and we are not advocating for market timing, but as history has shown, where there are Bears, there may also be opportunity!
Harnessing Innovation to Your Advantage
Destra is proud to partner with Granahan Investment Management, a firm that seeks to “Find Tomorrow’s Leaders, Today” by focusing on small cap growth investing for over the last 35+ years.
For additional information on small caps, please visit our Pathfinder blog, Advantage Small Caps. In addition, you can obtain more information by calling us at 877-855-3434.