Here’s something we have only seen once in 20 years
In a true study of contrasts, the tech-heavy Nasdaq 100 index has soared 6.3% during March while the Russell 2000 index of small-cap stocks has tumbled 7.5%.
That’s left the performance gap (known as the spread) between these two indices at nearly 14 percentage points—the widest monthly difference since March 2020, the early days of the pandemic.
Source: Blomberg, as of 03/28/2023
Why the extreme divergence? A few key drivers include:
Banking. Fears about the financial sector due to the recent failure of some regional and mid-size banks have hit the Russell 2000 Index—which has a 10% allocation to bank stocks—particularly hard. In contrast, the Nasdaq 100 currently has no bank exposure at all.
Funding. The smaller companies that make up the Russell 2000 typically require greater ongoing access to bank funding than the larger, more financially stable firms in the Nasdaq 100. Banks’ willingness to lend is likely to decrease going forward. Issuance of debt has also declined sharply this year due to market volatility and other factors, potentially crimping small-caps’ growth prospects.
Fed Chair Powell addressed these issues in his comments last week, noting that “events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would, in turn, affect economic outcomes.”
Clearly, investors have decided that large technology companies will be better able to weather such headwinds. We believe mega-cap tech stocks are an attractive asset class and have increased our exposure to the sector.
That said, the wide spread that now exists may present opportunities among beaten-down and overlooked small-caps. Unless we see a full-blown banking crisis that causes access to credit to evaporate—an unlikely outcome, in our view—it’s possible that small-caps’ relative performance could improve as fears about the banking system and companies’ access to credit subside.
The upshot: When markets hit extremes, it could be a good time to look for investment opportunities.
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This commentary is written by Horizon Investments’ asset management team.
Past performance is not indicative of future results.
The Russell 2000 Index tracks the performance of the 2,000 smaller companies included in the Russell 3000 Index. The Nasdaq-100 Index comprises 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange. You cannot invest directly in an index.
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