Investing in the stock market is often seen as a lucrative opportunity to grow one’s wealth. However, not all areas of the market demonstrate the same level of success. In this article, we will explore the often overlooked segment of small cap stocks in the US market and shed light on the hidden truth behind their performance.
The Russell 2000 Index
The Russell 2000 Index is a widely recognized benchmark that represents the performance of small-cap stocks in the US market. It includes a diverse range of 2,000 stocks, providing a comprehensive snapshot of this segment. By analysing the performance of this index, we can gain insight into the overall health and growth potential of small-cap stocks.
For the past six years, small cap stocks in the US market have experienced a period of stagnation. Since mid-October 2017, there have been no significant gains in this segment. This lack of progress is concerning considering the significant portion of the market that small cap stocks represent.
If we extend our analysis further, we find that even before this six-year period, from October 2013 to around October 2017, the gains were a mere 30%. This means that over a ten-year span, small cap stocks have only seen minimal growth. In comparison, the larger portion of the market has experienced gains of around 30% to 40% during the same time frame.
Perception vs. Reality
Despite the sluggish performance of small cap stocks, there is a prevailing perception that the US market is thriving and individuals are reaping substantial profits. This notion is primarily driven by the success of a select few stocks that dominate the S&P 500 index.
Interestingly, only seven stocks out of the top 500 companies in the US market have been driving the majority of the gains in recent years. These outliers create an illusion of prosperity in the market while overshadowing the lackluster performance of the broader small cap segment. It is crucial to recognize the disparity between the perception of how the market is performing and the reality behind the scenes.
The Breadth of the Market
The Russell 2000 Index represents the breadth of the US market, as it includes a wide range of small cap stocks. However, despite its extensive coverage, the performance of these stocks has been underwhelming. Over the past six years, they have shown little to no progress, and even over a ten-year period, the gains amount to a mere 40%.
When we evaluate these numbers in dollar terms, the low return on investment for the risk taken becomes apparent. It raises questions about whether investing in small cap stocks is worth the potential volatility and uncertainty associated with the equity markets.
Indian Markets: A Different Perspective
Taking a step away from the US market, we can observe similar patterns in other markets, such as India. Optically, it may appear that the market is performing well, but when we delve deeper, we see that many stocks are trading below their 200-day moving averages or struggling to reach new all-time highs. This indicates poor market breadth and reveals that not all stocks experience the same level of success.
However, there is a silver lining for the Indian market. It continues to see growth due to various factors, such as the country’s economic expansion and the strong support of domestic investors. Unlike the US market, India’s small-cap stocks have been benefiting from increased attention and investment from domestic sources.
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