Small-caps continue to lag. That may be good news for the overall stock market.

Small-cap stocks have been lagging behind their large-cap peers over the past 12 months. While frustrating to small-cap investors, it may bode well for the stock market’s future performance, based on historical data, according to Charlie Bilello, chief market strategist at Creative Planning, a wealth-management firm with over $200 billion assets under management. 

The S&P 500
rose 21% during the past 12 months, while the small-cap equity gauge Russell 2000
gained only 4.9% during the same period, according to FactSet data.

It’s a potentially bullish sign for the market, Bilello said in a Monday note. “Historically, stocks have experienced above-average returns following periods of small cap underperformance (‘weak breadth’) and below-average returns following periods of small cap outperformance (‘strong breadth’).”

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Creative Planning

Meanwhile, as S&P 500 currently trades near its record high while the Russell 2000 remains almost 20% below its record close, the setup bodes well for stocks performance in the next 12 months, according to Bilello.   

During the three previous biggest drawdowns of the Russell 2000 when the S&P 500 saw a record high, both indexes rallied in the following year, noted Bilello. And while it’s a small sample size, the Russell 2000 outperformed in the following year and joined the S&P 500 at the record highs, noted Bilello. 

Read: Small-cap stocks had a rough start to 2024 — but could shine the rest of this year, says stock market’s biggest bull

After the Russell 2000 saw a 19.2% decline from its local high in April 1999, the S&P 500 rose 14.3% over the following year and the Russell 2000 gained 36.5% during the same period, noted Bilello. 

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Creative Planning

In February 1991, after the Russell 2000 experienced a 13.5% drawdown, the index went up 35.5% in the following year, while the S&P 500 increased 12.1%. And in January 1985, after the Russell 2000 saw a 13.3% decline, the S&P 500 rose 17.4% over the next year and the Russell 2000 gained 18.2%, Bilello said.

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