8Are Not Hibernating This Winter - MORNING BREW Dec 18

STOCKS Bears Are Not Hibernating This Winter

Via Giphy

In fact, they're very much awake in small cap stocks, which fell into bear market territory yesterday to continue a brutal sell-off. Drilling down: The Russell 2000 index slumped to its lowest level since August 2017 in morning trading before dropping 2.3% yesterday. That brought the index's freefall to more than 20% from an August high—or as we in the biz like to call it, bear market territory. Let's start small Quick vocab break: The Russell 2000 is a benchmark index that measures the performance of small cap stocks, usually those with a market value of less than $5 billion. And here's the thing: Small caps had been outperforming the broader market this year, offering some shelter to investors bruised by trade war and big tech troubles. When the Russell 2000 hit its high on Aug. 31, it was up 14.3% year-to-date...while the S&P 500 was only up 9.9%. But after scoring double-digit gains in 2016 and 2017, the Russell 2000 is down 10% this year. That puts it on track for the worst annual drop since ‘08. What could be going on? It seems like rising interest rates and higher wage costs have dampened enthusiasm for investing in smaller (and often riskier) companies. But this is bigger than small caps A sell-off in small caps is like a cold—you might be the first in the office to get it...but after you accidentally sneeze all over Kevin, you won't be the last. Since small caps are more sensitive to changing market sentiment, what they're enduring now could spread to larger names soon, some say. Keep in mind...the Russell 2000 fell into a bear market in January 2016, too. It bottomed out in March of that year, but no recession followed. Let's end on a high note: Get ready for the "January Effect," when small caps historically outperform large cap names around the start of the year.