Russell Index Archives

Wall Street’s New Obsession: Why Everyone’s Talking About Small Caps

Posted on July 17, 2024July 17, 2024 by slightbourne@noblecapitalmarkets.com

In the ever-evolving world of finance, savvy investors are constantly on the lookout for the next big opportunity. As we navigate through 2024, a compelling narrative is unfolding in the realm of small cap and growth companies. These often-overlooked segments of the market are suddenly finding themselves in the spotlight, offering potentially lucrative prospects for those willing to look beyond the usual mega-cap darlings.

The recent surge in small cap stocks, as evidenced by the impressive performance of the Russell 2000 index, has caught the attention of both retail and institutional investors. This shift comes at a time when the market is reassessing its stance on interest rates, inflation, and the broader economic recovery. But what’s driving this renewed interest, and more importantly, what opportunities does it present?

First and foremost, the anticipation of interest rate cuts has breathed new life into small cap stocks. These companies, typically more sensitive to economic cycles, stand to benefit significantly from a more accommodative monetary policy. Lower interest rates can reduce borrowing costs, potentially boosting profitability and fueling growth initiatives. This environment could prove particularly advantageous for small cap growth companies, which often rely on access to capital to fund their expansion plans.

Moreover, as the economy continues to recover and diversify post-pandemic, small caps are well-positioned to capitalize on emerging trends and niche markets. Unlike their larger counterparts, these agile companies can quickly adapt to changing consumer preferences and technological advancements. From innovative healthcare solutions to cutting-edge clean energy technologies, small cap growth companies are often at the forefront of transformative industries.

The potential for outsize returns is another compelling factor drawing investors to this space. Historically, small caps have demonstrated the ability to generate significant returns, especially during periods of economic expansion. While past performance doesn’t guarantee future results, the current market conditions and economic indicators suggest a favorable environment for small cap outperformance.

However, it’s crucial to approach this opportunity with a discerning eye. Not all small caps are created equal, and thorough due diligence is essential. Investors should focus on companies with strong fundamentals, solid balance sheets, and clear paths to profitability. In the growth segment, particular attention should be paid to addressable market size, competitive advantages, and the quality of management teams.

Sector-specific opportunities also abound within the small cap and growth universe. For instance, the ongoing digital transformation across industries presents numerous opportunities in technology and software. Similarly, the push towards sustainable practices is opening doors for innovative companies in renewable energy, recycling, and eco-friendly consumer goods.

Another intriguing aspect is the potential for mergers and acquisitions activity. As larger companies look to innovate and expand, well-positioned small caps could become attractive takeover targets, potentially leading to premium valuations for shareholders.

It’s worth noting that investing in small caps and growth companies comes with its own set of risks. These stocks can be more volatile than their large-cap counterparts and may be less liquid. Additionally, company-specific risks are often more pronounced in smaller firms. Therefore, diversification and a long-term investment horizon are crucial when exploring this space.

For those looking to gain exposure to this exciting segment, various approaches are available. Direct investment in individual stocks offers the potential for significant returns but requires extensive research and risk management. Alternatively, exchange-traded funds (ETFs) and mutual funds focused on small cap and growth companies provide a more diversified approach, spreading risk across a basket of stocks.

As we look ahead, the renewed interest in small cap and growth companies appears to be more than just a fleeting trend. With favorable macroeconomic conditions, the potential for innovation-driven growth, and the possibility of sector-specific tailwinds, this segment of the market offers compelling opportunities for discerning investors.

In conclusion, while the allure of high-flying tech giants and blue-chip stalwarts remains strong, the current market dynamics suggest that it might be time to think small for potentially big returns. As always in investing, thorough research, careful consideration of risk tolerance, and a balanced approach are key to navigating this exciting but complex landscape.

Beyond the Big Names: Inside the Russell 3000’s Crucial Annual Update

Posted on June 28, 2024June 28, 2024 by slightbourne@noblecapitalmarkets.com

Today marks a significant event in the financial world as the annual reconstitution of the Russell indexes takes effect after the market closes. This process, particularly for the Russell 3000 index, is a crucial moment for investors of all experience levels to pay attention to, as it can have far-reaching implications for both individual stocks and the broader market landscape.

The Russell 3000 index, which encompasses the largest 3,000 U.S. stocks by market capitalization, serves as a comprehensive barometer of the U.S. equity market. Its annual rebalancing is a carefully orchestrated event that reflects the evolving dynamics of the market, capturing the rise of emerging companies and the decline of others.

As the closing bell rings today, a new roster of companies will join the Russell 3000, while others will bid farewell. This shift is not merely a technicality but a reflection of changing market realities. Companies that have grown in value over the past year may find themselves newly included, signaling their ascent in the business world. Conversely, those that have fallen out of favor or experienced significant market cap declines may be removed, highlighting the cyclical nature of market success.

For investors, both novice and seasoned, this reconstitution presents a unique opportunity to gain insights into market trends and potential investment prospects. The companies being added to the index often represent growth stories or emerging sectors that are gaining traction. By paying close attention to these additions, investors can identify potential up-and-coming stars in the market before they become household names.

This year’s reconstitution has seen some notable changes, with several companies making their debut on the Russell 3000. Among the newcomers are Graham Corp(GHM), Lifeway Foods (LWAY), and Ocugen (OCGN), DLH Holdings Corp (DLHC), and NN Inc (NNBR). These additions reflect the dynamic nature of the market and highlight emerging trends across different sectors.

The inclusion of these companies in the Russell 3000 index is likely to bring significant benefits. For Graham Corporation, a company specializing in critical equipment for the defense, energy, and chemical industries, this recognition could attract more investor attention to the industrial technology sector and its role in key infrastructure. Lifeway Foods, a leading probiotic and fermented food company, may see increased interest in the growing health food sector. Ocugen, a biotechnology company focused on developing gene therapies and vaccines, could draw more eyes to the innovative potential in healthcare and pharmaceutical. DLH Holdings Corp, a provider of technology-enabled business process outsourcing and program management solutions, highlights the growing importance of efficient business services and government contracting. NN Inc, a diversified industrial company producing high-precision components and assemblies, underscores the continued significance of advanced manufacturing in various industries.

The impact of today’s reconstitution extends beyond individual stock picks. Index funds and ETFs that track the Russell 3000 will need to adjust their holdings to reflect the new composition. This rebalancing can lead to increased trading volumes and potential short-term price volatility for the affected stocks. For active traders, this volatility can create opportunities, while for long-term investors, it underscores the importance of understanding the underlying mechanisms that drive market movements.

It’s worth noting that while the Russell 3000 includes smaller companies compared to more famous indexes like the S&P 500, its comprehensive nature makes it a valuable tool for investors looking to gauge the health of the broader U.S. equity market. The index captures approximately 98% of the investable U.S. equity market, making it a more inclusive representation of the economy than narrower large-cap focused indexes.

As the day unfolds, investors would do well to keep an eye on the final list of additions and deletions published by FTSE Russell. This information can provide valuable insights into sector rotations, emerging trends, and potential investment opportunities. Moreover, understanding the methodology behind these changes can help investors make more informed decisions about their portfolios.

In conclusion, today’s Russell 3000 reconstitution is more than just a reshuffling of an index. It’s a snapshot of the current state of the U.S. equity market and a glimpse into its future direction. For investors of all levels, from novices just starting their journey to experienced market veterans, paying attention to these changes can offer valuable insights and potentially lucrative opportunities. As the market closes today and the new index composition takes effect, remember that even in the world of smaller companies, massive value awaits those who know where to look.

For more detailed information about the Russell reconstitution process and its implications, investors can visit the official FTSE Russell website at https://www.lseg.com/en/ftse-russell/russell-reconstitution. This resource provides comprehensive insights into the methodology, timelines, and impacts of the annual reconstitution, helping investors stay informed about this crucial market event.

Russell Reconstitution 2024: The Ultimate Guide to This Year’s Index Shake-Up

Posted on May 28, 2024June 28, 2024 by slightbourne@noblecapitalmarkets.com

The annual Russell reconstitution is one of the biggest events in the investing world, shaping the composition of the widely followed Russell indexes, including the influential Russell 2000 and Russell 3000 indexes. This comprehensive process ensures these indexes accurately represent various U.S. market segments by reflecting changes in company market capitalizations and characteristics.

What is the Russell Reconstitution?
The Russell reconstitution is an annual rebalancing process where all Russell equity indexes undergo a complete overhaul. During reconstitution, the index provider FTSE Russell rebuilds the Russell indexes from the ground up based on new data on eligible stocks’ market caps, trading volumes, and other criteria.

This vital event maintains the integrity of Russell indexes as accurate benchmarks by updating their holdings to reflect the current landscape of the U.S. stock market. Reconstitution allows companies that have grown or shrunk in value to be properly represented in the appropriate Russell indexes.

The Importance of the Russell 3000 Index
A major focus of the reconstitution is the Russell 3000 Index, considered one of the leading benchmarks for the overall U.S. equity market. This index aims to capture 98% of U.S. stocks by market cap.

On May 24, 2024, FTSE Russell published its annual reconstitution updates, revealing notable new additions to the Russell 3000 like Ocugen, Eledon Pharmaceuticals, NN Inc., and Bitcoin Depot. Such changes highlight how reconstitution allows the index to evolve with the market.

The Closely Watched Russell 2000 Index
Another keenly watched Russell index is the small-cap Russell 2000, which tracks the smallest 2,000 companies in the Russell 3000 by market cap. This index is considered a leading benchmark for small-cap U.S. stocks.

During reconstitution, companies can move in or out of the Russell 2000 based on changes to their market capitalization or investment style exposures like value vs growth. This rebalancing ensures the Russell 2000 precisely represents today’s small-cap universe.

IPO Additions Throughout the Year
In addition to the annual reset, FTSE Russell regularly adds eligible IPO stocks to its indexes on a quarterly basis. This allows newly public companies to quickly enter major benchmarks like the Russell 3000 instead of waiting for reconstitution.

Russell’s IPO treatment distinguishes between fully underwritten IPOs and partial or “best efforts” public offerings when determining appropriate share weights and eligibility.

Rebalancing Drives Major Trading Activity
Russell reconstitution is a major trading event, as index funds and ETFs tracking Russell benchmarks must rebalance their portfolios to match updated index constituents and weightings.

Estimates suggest hundreds of billions in assets follow the Russell benchmarks, meaning their reconstitution announcements can trigger massive shifts in demand for newly added or removed stocks.

Following Russell’s Transparent Methodology
FTSE Russell’s reconstitution process follows an objective, rules-based methodology spelled out in publicly available documentation. Key eligibility factors include:

Trading on eligible U.S. stock exchanges
Meeting minimum price, market cap, and liquidity thresholds
Sufficient public share float and voting rights
Eligible corporate structures like public operating companies

Staying on top of Russell’s transparent reconstitution rules allows investors to understand how index changes may impact their portfolios and positions.

The Russell Reconstitution’s Continuing Impact
As indexes like the Russell 3000 continue gaining prominence as core portfolio benchmarks, Russell reconstitution’s influence grows. The 2024 event reinforces the Russell indexes’ role in definitively capturing U.S. market performance by surgery evolving index holdings to match current realities.

Whether reallocating client assets, developing new index funds, or simply understanding market composition changes, the 2024 Russell reconstitution guide will prove essential reading for investors. Follow this yearly event closely, as it shapes the benchmarks driving U.S. equity allocations for years to come.

Upcoming 2024 Russell Reconstitution Schedule

Friday, May 31st, June 7th, 14th, and 21st – Preliminary membership lists (reflecting any updates) posted to the FTSE Russell website after 6PM US eastern time.

Monday, June 10th – “Lock-down” period begins with the updates to reconstitution membership considered to be final.

Friday, June 28th – Russell Reconstitution is final after the close of the US equity markets.

Monday, July 1st – Equity markets open with the newly reconstituted Russell US Indexes.

Small Cap Stocks Could Soar Next – Here’s Why the Russell Rally May Be Imminent

Posted on May 22, 2024May 22, 2024 by slightbourne@noblecapitalmarkets.com

The major U.S. stock indexes have been on a tear in 2024, with the S&P 500 and Nasdaq Composite recently locking in fresh 52-week highs. However, one area of the market that has yet to fully participate in the rally is small-cap stocks, as represented by the Russell 2000 index. While the Russell 2000 is still up around 4% year-to-date, it has significantly lagged the double-digit gains of its large-cap counterparts.

This underperformance from smaller companies may seem perplexing given the robust economic growth and strong corporate earnings that have powered stocks higher. However, there are a couple potential factors holding small caps back for now.

First, investor sentiment remains somewhat cautious after the banking turmoil of 2023. While the systemic crisis was averted, tighter lending standards could disproportionately impact smaller businesses that rely more heavily on bank financing. Recent upticks in loan activity provide some optimism that credit conditions may be thawing.

The other overhang for small caps has been the aggressive interest rate hiking cycle by the Federal Reserve to combat inflation. Higher borrowing costs weigh more heavily on smaller companies compared to their large-cap peers. However, the Fed is now expected to pivot towards rate cuts later in 2024 once inflation is tamed, providing a potential catalyst for small-cap outperformance.

Historically, small caps have tended to lead coming out of economic downturns and in the early stages of new bull markets. Their higher growth orientation allows them to capitalize more quickly on an inflection in the business cycle. A timely Fed pivot to lower rates could be the rocket fuel that allows the Russell 2000 to start playing catch-up in the second half of 2024.

For investors, any near-term consolidation in small caps may present opportunistic entry points in this economically-sensitive segment of the market. While volatility should be expected, the lofty valuations of large-cap tech and momentum plays leave less room for further upside. Well-managed small caps with pricing power and secure funding could offer asymmetric upside as the economic landscape becomes more hospitable in the latter part of the year.

For long-term investors, any potential small-cap rebound could be particularly compelling given the cyclical nature of small versus large-cap performance. Over decades of market history, there has been a tendency for leadership to rotate between the two size segments. After large caps dominated the past decade, buoyed by the tech titans and slow-growth environment, the economic restart could allow small caps to regain leadership.

From a portfolio construction standpoint, maintaining exposure to both small and large caps can provide important diversification benefits. The low correlation between the size segments helps smooth out overall equity volatility. And for investors already overweight large caps after years of outperformance, trimming some of those positions to reallocate towards small caps could prove timely.

While major indexes continue grinding higher, prudent investors should avoid complacency and think about positioning for what could be a new market regime. Small caps have historically possessed a robust return premium over large caps. As the economic backdrops evolves, 2024 may mark the start of small caps returning to form as drivers of broad market returns once again.

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Should We Be Bullish on Small Caps?

Posted on August 25, 2023August 27, 2023 by phoffman@channelchek.com

Powell’s Right About the Resilient Economy, How it May Affects Some Stocks

One can generalize and say small cap companies are more sensitive to recessions than large caps – and they would be correct. In his speech in Jackson Hole, Fed Chair Jerome Powell said, “But we are attentive to signs that the economy may not be cooling as expected. So far this year, GDP growth has come in above expectations and above its longer-run trend, and recent readings on consumer spending have been especially robust.” His words sound like a soft landing, no landing, or puts any hard landing far off into the future. Over the past few years, the performance of small-cap stocks has not held its own relative to the performance of large caps when highly weighting the stratospheric performance of mega caps.

After the most recent year and a half of both business news and investors expressing recession concerns, the newer conversation is one of an economic soft landing. Those mentioning the inverted yield curve “proof” has been silenced as rates out on the curve have begun to move steadily higher. The conversation has now been replaced with expectations of increased economic activity. Even if expectations don’t fully come to fruition, it is expectations that move markets – just look at last year’s down stock market which was the result of investors expecting a recession was imminent.

Will Small Caps Finally Run With the Bulls?

The S&P 600 Small Cap Index is is at the same level as December 2020
(Source: S&P Dow Jones Indices)

The S&P 600 small cap index is up by nearly a third as much as the S&P 500 this year (4.40% versus 13.98%) and trades at only 15 times earnings. BofA Securities using Russell Index numbers for its analysis of Russell 1000 large cap and Russell 200 small cap indexes, calculated that small companies are 30% cheaper than usual in comparison to big ones. Over the next decade, according to BoA Securities estimates, small caps are poised to gain an average of 11% a year versus 4% for large caps.

The S&P 600 Small Cap Index has underperformed the S&P Large Cap Index by nearly 10% over the past year. Another well-respected firm, T. Rowe Price, takes the expectations in small-caps a step further in its August insight report titled: The Outlook for U.S. Smaller Companies Looks Increasingly Compelling (Now is not the time to wait on the sidelines). The report highlights additional factors supporting the increased probabilities of small-cap performance.

T. Rowe Price discussed how smaller companies are more oriented towards U.S. economic activity. The author, Curt Organt, the portfolio manager of the firms smaller company equity strategy, also pointes to the many bills in Congress that support capital spending projects in the U.S., explaining this will also provide a tailwind.

• “While the U.S. equity market has become increasingly concentrated at the top end over the past decade, smaller‑company valuations are at their most compelling levels in decades.”

• “History shows that as high concentration in the S&P 500 Index begins to unwind, a new cycle of small‑cap outperformance usually begins.”

• “Shifting trends in the U.S. economy are particularly supportive of smaller companies, providing a potential catalyst for higher earnings growth.”

The portfolio manager discussed how, through history, investors in small-cap stocks ordinarily command higher relative valuations compared to their larger counterparts. At present, as mentioned before, small-cap stocks are currently trading at a substantial discount in relation to large-cap stocks.

Downside protection is also seen as a positive in small-caps, whether compared to its own history, or to today’s large cap valuations. The low valuations in the smaller companies do offer a degree of downside protection during market downturns.

Take Away

At the conclusion of his Jackson Hole speech, Powell said, “As is often the case, we are navigating by the stars under cloudy skies. In such circumstances, risk-management considerations are critical.” Although he was talking about U.S. monetary policy, the words apply equally well if applied to a portfolio’s investment policy. One can never be completely sure of what is around the corner that can either accelerate returns or set the portfolio back. But, placing probabilities on your side, over time, is good practice.

One can never have too much information when selecting companies to invest in. Small company information is particularly challenging for investors to find. Creating a login to Channelchek allows access to data on 6,000 small and microcap companies; this may be the key to further placing investment probabilities on your side. And, if you’d like to take your exploration for the ideal smaller companies to invest in to a higher level, join Noble Capital Markets and Channelchek at its annual investment conference, NobleCon19, this fall.

Paul Hoffman

Managing Editor, Channelchek