By Philip Lawlor, head of Global Investment Research
The neck-and-neck performances of the Russell 1000 and Russell 2000 in 2020 (up 21% and 20%, respectively) masks the intense swings in leadership between the two indexes as the COVID-19 crisis unfolded.
As shown below, the two US indexes and the FTSE Asia Pacific ex Japan, outdistanced their global peers by a wide margin in 2020. Only the UK FTSE All-Share finished lower.
Equity market total returns – Q4 and full-year 2020 (% change, LC)
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee to future results. Please see the end for important disclosures.
US small-caps enjoy catch-up rally after lagging most of 2020
The interplay between the two US indexes can be largely traced to the shifting sentiment about the post-pandemic US recovery outlook. This journey is highlighted in the chart below, which dissects each index’s full-year performance into five distinct phases. We detailed these turning points in a recent blog post.
After badly trailing its large-cap counterpart in both the March meltdown and the summertime post-lockdown rally, the Russell 2000 has carried the day since early September. The small-cap index surged more than 26% in Q4, significantly eclipsing the Russell 1000, as vaccine breakthroughs and steadfast monetary and fiscal support spurred economic recovery hopes for the coming year. This year’s record M&A activity also helped smaller stocks, which are often takeout targets.
Five distinct phases of 2020 performance (% change)
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The Russell 2000’s cyclical edge
The US small-cap revival also got a lift from the broadening of the risk rally in Q4, from the high-flying tech stocks dominating the Russell 1000 into the stocks considered more sensitive to the economic cycle. These include financials and oil & gas, which make up 18% of the small-cap index, or nearly six percentage points more than in its large-cap counterpart. The Russell 2000 is also more heavily weighted to outperforming health care (by roughly five percentage points). In contrast, technology accounts for only 12%, less than half the 27% weight in the Russell 1000.
We see the impact of these compositional differences in chart below, which show the top 10 industry contributors to each index’s 2020 performance.
Top 10 industry contributors to returns (% of total)
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
The robust Russell 2000’s outperformance since early September has also coincided with a sharp acceleration in the rotation away from defensive havens into cyclical sectors of the economy, as well as in the weakening of the US dollar. Though uncertainties remain high, these second-half dynamics, should they persist, offer clues to what may lie ahead for markets in the new year.
Russell 1000/Russell 2000 relative returns, Russell 1000 Defensive/Dynamic (Cyclical) (Rebased, LC) vs USD real effective exchange rate
Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
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