After sprinting ahead in the first half of the year, ongoing trade frictions, political turmoil, monetary policy uncertainty, and slowing global growth weighed on small-cap stocks in Q3. The Russell 2000 Index pulled back -2.40% for the quarter, returning +14.18% for the year, lagging large-cap stocks for both periods. Earnings growth from the second quarter was negative again for small-caps. This reflection of decelerating economic activity prompted a strong rotation into value stocks in September. Although the Russell 2000 Value Index outperformed the Russell 2000 Growth Index for the quarter, the Russell 2000 Growth Index remains ahead year to date.
U.S. equity markets were positive in Q2 while building upon the impressive returns from Q1. This resulted in the S&P 500 Index experiencing the best first half of the year since 1997. While small-caps outperformed large-caps in the first quarter, the reverse was true in the second quarter. Yet whether large or small, returns were quite robust: The S&P 500 Index returned +18.54% for the first half of the year while the Russell 2000 Index returned +16.98%. June was particularly strong; in fact it was the strongest June since 1955, as measured by the S&P 500 Index.
The S&P 500 Index opened 2019 with its best January performance since 1987 and continued moving higher in February and March finishing the quarter up +13.65%. This also proved to be the Index’s strongest calendar quarter since Q3 2009 and its best Q1 since 1998. The Russell 2000 Index delivered an even higher double-digit return of +14.58% for the quarter. The strong performance that occurred during the first half of the quarter was a continuation from the Christmas bounce, with equities moving broadly higher despite earnings estimates trending lower.
After impressively powering through a wall of worry in Q3, equity markets abruptly began Q4 by falling sharply in October. The S&P 500 Index then oscillated to a slight gain in November, while December ushered in yet another round of sharp losses. Not only did a Santa Claus Rally fail to materialize, the S&P 500 Index produced its weakest Christmas Eve ever. However, the day after Christmas was far merrier for investors, with the S&P 500 Index generating its largest one-day gain since March 2009 and the Dow Jones Industrial Average posting its first ever 1,000+ point day.
The S&P 500 Index posted a Q3 return of +7.71%, its best quarterly return since 2013. The Russell 2000 Index was up +3.58%, while lagging larger stocks for the quarter, its +11.51% return year-to-date still outperformed the S&P 500 Index. Growth outperformed value across all market cap ranges, a trend that has been in place for most of the past two years. Factor attribution in small caps showed momentum was a key driver and component of growth returns, while value factors were largely ignored until July.
Stocks moved higher in Q2, though changes in investor concerns caused the movement to come in waves. The Russell 2000 Index posted positive returns in all three months to finish with a +7.75% total return for the quarter. Corporate earnings growth was a key driver as the positive impact of the corporate tax rate reduction began to take hold and economic growth accelerated.