While the 2020 picture looks promising for US small-cap equities, according to market experts at FTSE Russell and Cboe, a number of risks still lurk on the horizon for investors.
Alec Young, managing director, global markets research, FTSE Russell:
“After a 25% Russell 2000 Index total return last year, there’s room for optimism although reasons for near-term caution have also recently emerged. On a positive note, the domestic economic picture is expected to be strong, led by a resilient consumer, accommodative financial conditions and an uptick in global leading indicators, all of which would bode well for small caps—an economically sensitive asset class that tends to do best when growth is picking up. That said, volatility is a normal part of investing and often stems from macro risks that are inherently hard to predict like the sudden coronavirus outbreak or the outcome of November’s presidential and congressional elections. In addition, 2019’s strong performance has left Russell 2000 valuations at a historically elevated level of 25X 12-month forward consensus EPS, (vs. a 10-year average of 22X) leaving investors with less margin for error if high 2020 earnings growth expectations fail to materialize. As such, we are excited to work with Cboe to allow them to bring investors Russell 2000 risk management tools.”
Rick Rosenthal, director, business development, Cboe:
“Over the past year, U.S. small-caps as measured by the Russell 2000 Index lagged behind their large-caps counterparts in the Russell 1000, which could potentially signal opportunity for investors as we move into 2020. The divergence between the two indexes is approximately 95 points above the average spread. And with a +4% move thus far in February, the Russell 2000 may be reflecting global market fears around the coronavirus coupled with low interest rates and continuing economic growth as indicated by housing and manufacturing.”
Finding ways to harvest volatility and manage market risk is a key to successful long-term investing. Cboe has introduced a new paper with Wilshire Associates that studies the long-term performance across a number of market cycles for benchmarks designed to represent the long-term performance of proposed hypothetical options strategies.
© 2020 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE Global Debt Capital Markets Inc. and FTSE Global Debt Capital Markets Limited (together, “FTSE Canada”), (4) MTSNext Limited (“MTSNext”), (5) Mergent, Inc. (“Mergent”), (6) FTSE Fixed Income LLC (“FTSE FI”) and (7) The Yield Book Inc (“YB”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB. “FTSE®”, “Russell®”, “FTSE Russell®”, “MTS®”, “FTSE4Good®”, “ICB®”, “Mergent®”, “The Yield Book®”, and all other trademarks and service marks used herein (whether registered or unregistered) are trademarks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, FTSE Canada, Mergent, FTSE FI, YB. FTSE International Limited is authorised and regulated by the Financial Conduct Authority as a benchmark administrator.
All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data is provided “as is” without warranty of any kind. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the accuracy, timeliness, completeness, merchantability of any information or of results to be obtained from the use of the FTSE Russell Indexes or the fitness or suitability of the FTSE Russell Indexes for any particular purpose to which they might be put. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance.
Views expressed by Alec Young of FTSE Russell and Rick Rosenthal of Cboe are as of February 21 and subject to change. These views do not necessarily reflect the opinion of FTSE Russell or the LSE Group.
The Wilshire paper is intended for financial professionals such as independent broker-dealers and registered investment advisors, not the general public.
No responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for (a) any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this document or links to this document or (b) any direct, indirect, special, consequential or incidental damages whatsoever, even if any member of the LSE Group is advised in advance of the possibility of such damages, resulting from the use of, or inability to use, such information.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.
Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
This publication may contain forward-looking assessments. These are based upon a number of assumptions concerning future conditions that ultimately may prove to be inaccurate. Such forward-looking assessments are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially. No member of the LSE Group nor their licensors assume any duty to and do not undertake to update forward-looking assessments.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group data requires a licence from FTSE, Russell, FTSE Canada, MTSNext, Mergent, FTSE FI, YB and/or their respective licensors.