Is This Small-Cap Rally Good Or Bad

What Does It Mean For The Future?

Over the past week and a half, small-caps haven’t just rallied relative to large-caps. They’ve historically rallied.

For the 5 trading days ending Tuesday of this week, the Russell 2000 returned 11.5%, making it the 22nd largest 5-day gain in the index’s 40-year history! But that’s not even the most impressive part. Over the 5-day spans ending Tuesday and Wednesday, the Russell 2000 outperformed the S&P 500 by 9.9% and 10%, respectively. Where do those two outperformance gaps rank?

#1 and #2 all-time!

Plus, the next largest performance gap is almost a full percent behind. In other words, the past several trading days have been without precedent.

But are those results meaningful in telling us what might happen next? Is this a good sign? Is it a bad sign?

You can look at the other top 10 dates and not spend a lot of time realizing that these are very turbulent market periods. 1987 was Black Monday market crash. 2000 was the tech bubble. 2016 was Donald Trump getting elected. 2020 was the COVID recession. Obviously, those were highly anomalous and volatile periods, so the value in using them as guides is probably limited.

We can, however, try to interpret what market rotations and current underlying conditions tell us what could happen moving forward. The slowdown in GDP growth, the uptick in unemployment, rising credit delinquencies and maxed out consumer spending are all warning signs that the U.S. economy could be trending towards recession. Since the Fed and the government have spent most of the past 17 years keeping rates at or near zero and spending obscene amounts of money in order to avoid recession, we don’t have a lot of good recent examples to work with for guidance. We’ll have to mostly stick with generally accepted market behaviors and trends.

Is this small-cap rotation a good or bad sign? Let’s examine a few arguments.