Why Did Small-Cap Stocks Have a Stellar Year in 2016?

The above graph compares the total annual returns on the Russell 2000 Index and the S&P 500 Index over the last ten years. While small caps have been underperforming large caps in 2014 and 2015, they had a stellar year in 2016. They outperformed the latter by ten percentage points on a total returns basis. Small-cap stocks also outperformed the large-cap stocks (OEF) since the Great Recession due to monetary accommodation.

Many suggested that the stronger dollar (UUP) has been the major reason behind small-cap stocks’ outperformance. The rationale is that a stronger dollar impacts the currency-adjusted profits of large-cap stocks. Large-cap stocks have high exposure to international markets, while small-cap stocks focus domestically.

While that’s true, small-cap stocks have historically had a negative correlation with the dollar. Also, the dollar’s rally in 2014 and the current rally came about due to higher interest rate expectations—a negative for small-cap stocks.

View more information: https://marketrealist.com/2017/01/small-caps-stellar-2016/

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