Small-Cap Investing Amid Coronavirus Concerns—Royce
article 03-05-2020

Navigating The Small-Cap Market Amid Coronavirus Concerns

Co-CIO Francis Gannon on how Royce is investing during a tumultuous time and why he remains confident in the long-term prospects for small-cap stocks.

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Recent market tumult may be relatively low on the list of many investors’ concerns as the world comes to grips with the outbreak of the coronavirus on a global scale. Still, the markets remain highly volatile, even in the face of recent central bank accommodations. When corrections occur as a result of events that don’t initially appear directly tied to finance or the economy, it may be even more difficult to remain level-headed, especially in the midst of what has felt at times like an unceasing move downward for stocks.

However, we think it’s important to tune out the noise and maintain a long-term perspective. The market has—eventually—withstood many challenges and problems. It has historically shown remarkable resilience. We believe this is especially worth keeping in mind as concerns continue to mount about the state of the global economy and the stumbling global stock market.

To be sure, we have been actively pursuing opportunities over the last few weeks as share prices have fallen, using the same long-term investment orientation that is a perennial element in our work. So while we cannot say when the markets will stabilize, we feel confident that they will and that patient, disciplined approaches should be rewarded.

Indeed, so far the small-cap market’s 2020 peak-to-trough decline of about 13.0% is comparable to the depth of the decline we have seen in most years. The small-cap market has seen double-digit intra-year declines in 21 of the last 25 years, with a median loss of 14.0%.

Russell 2000 Intra-Calendar-Year Largest Declines from 1994–2019

Russell 2000 Intra-Calendar-Year Largest Declines from 1994–2019

It’s also true that small-caps have historically done well in economic conditions that are similar to those we’re currently experiencing—when near-term growth has been weak and the Fed has been accommodative by lowering rates—as the graph below shows.

Small-Cap Results in Two Scenarios vs. Long-Term Rolling Average
Russell 2000 Monthly Rolling 1-Year Returns by Starting ISM Level from 12/31/78 through 12/31/19

Russell 2000 Monthly Rolling 1-Year Returns by Starting ISM Level from 12/31/78 through 12/31/19

Past performance is no guarantee of future results. The ISM Manufacturing Index (ISM) monitors employment, production, inventories, new orders and supplier deliveries. When the ISM is less than 49.3 it was in the bottom 25% of its historical readings since 1978. Source: Bloomberg

Additionally, subsequent one-, two-, and three-year periods have been strong in economic scenarios similar to today’s.

Percentage of Periods with Positive Russell 2000 Returns
Monthly Rolling 1-Year Returns In Periods With Near-Term Weak Economic Growth (ISM <49.3) and an Accommodative Fed (Fed Funds Rate Lower YoY) from 12/31/78 through 12/31/19

1yr rolling2yr rolling3yr rolling

Past performance is no guarantee of future results. The ISM Manufacturing Index (ISM) monitors employment, production, inventories, new orders and supplier deliveries. When the ISM is less than 49.3 it was in the bottom 25% of its historical readings since 1978. Source: Bloomberg

So while we share the concerns about the spread of the coronavirus and its shorter-term effects on the market and economy, we are also mindful about the critical need to remain focused on longer-term outcomes.

Stay tuned…

More Small-Cap Perspectives

 

Important Disclosure Information

Mr. Gannon’s thoughts concerning recent market movements and future prospects for small-company stocks are solely those of Royce Investment Partners, and, of course, there can be no assurances with respect to future small-cap market performance.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

The ISM Manufacturing Index (ISM) monitors employment, production, inventories, new orders and supplier deliveries.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and / or Russell ratings or underlying data and no party may rely on any Russell Indexes and / or Russell ratings and / or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. All indexes referenced are unmanaged and capitalization-weighted. The Russell 2000 Index is an index of domestic small-cap stocks that measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 Index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)

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