Throughout December the Russell 2000 index of US small caps has consistently traded above 1,600 - a key technical level that many technical analysts had been looking out for.
Since the start of 2019, the Russell 2000 has gained 24%. But with macroeconomic conditions changing, will small-cap stock traders continue to see gains in 2020?
Russell 2000's gains since start of 2019
Why Russell 2000 small caps are worth traders’ attention
Driving the Russell 2000’s rally are the attractive valuations of companies found on the US small-cap index compared to larger cap indices.
By doing most of their business in the US, small-cap companies are insulated from trade wars and other international pressures, although they are aren’t immune from the ongoing recession fears that have dogged the US economy in 2019.
However, Bank of America's Jill Carey Hall told Bloomberg TV that US small caps have priced in recession fears:
"Assuming we avoid a recession next year, small caps have been pricing in a poor case scenario. One change that we came out with in our year ahead outlook is we have been cautious on small caps relative to large," said Hall. "But we think as we move from this downturn in the US to a recovery period, that we should see small caps outperform large as we head into the new year."
“But we think as we move from this downturn in the US to a recovery period, that we should see small caps outperform large as we head into the new year” - Bank of America's Jill Carey Hall
Another point Hill makes is that there is still a correlation between macroeconomic conditions and the performance of small caps. Should the global economy pick up then small-cap stocks should gain. Especially as for much of 2019, a recession was priced in.
Russell 2000 small caps to watch
EverQuote [EVER], an insurance price comparison website, has seen its market value skyrocket to now be worth over $8 billion. The stock is up a huge 624% this year and carries a Zacks Rank 1 (Strong Buy). EverQuote even managed to reduce losses, something that large-cap tech stocks like Shopify have continually failed to do.
Achillion Pharmaceuticals’ [ACHN] share price is up 270% this year, trading around $6.26. In October, the share price jumped a whopping 81% from $3.52 to $6.38 after Alexion announced it would buy Achillion in a $930 million deal.
Digital Turbine Inc.
Digital Turbine's [APPS] share price is up 288% this year. Yet, over the past month, the stock has faltered. Analysts will now be looking for some good news when the mobile software company posts its next set of earnings results. Expectations are for earnings of $0.05 per share - up a cent from the previous year.
Analysts tracking the stock have pinned a $8.75 target on Digital Turbine - a decent 19.2% gain on the current share price.
Russell 2000 in 2020
So is it worth investing in individual US small caps or an ETF that tracks the Russell 2000?
In a Bloomberg survey of five strategists, four think small caps will outperform next year. Steven DeSanctis at Jefferies is the most bullish, forecasting the Russell 2000 to gain 7% to close 2020 at 1,750.
According to Art Hogan, Chief Market Strategist at National Securities, the Russell 2000 is starting to close the gap on the likes of the S&P 500.
“It’s been three years since the [Russell 2000] has actually done better than the S&P 500. That doesn’t happen, historically. It’s starting to close that gap a little bit. It got as wide as 600 basis points. It’s down to 400 basis points. ... So, I think that’s a gap that closes in the front half of 2020 and I think small-cap stocks will finally get some attention.”
Hogan thinks that the US economy will enjoy a steady 2% growth next year. This will help domestic small-cap stocks, and the Russell 2000, push higher.
The big risk, as Hogan sees it, is if the trade war between the US and China escalates and triggers a recession.
Another optimist is Dan Veru, chief investment officer at Palisade Capital Management. Veru told Bloomberg News:
“Small-caps could be the place to be. You’ve seen the underlying strength of the economy. If we do in fact get a trade deal, that’s going to make those more US-centric companies much more exciting.”
“Small-caps could be the place to be. You’ve seen the underlying strength of the economy. If we do in fact get a trade deal, that’s going to make those more US-centric companies much more exciting” - chief investment officer at Palisade Capital Management, Dan Veru