The Dow Might Be Calm, but Small Caps Are Anything But

Even as the market eased down today, the small-cap arena has seen a lot more volatility.

Jun 11, 2014 at 9:04PM

On Wednesday, the Dow Jones Industrials (DJINDICES:^DJI) fell 102 points, responding to calls of weaker global economic growth and political uncertainties in the wake of the primary loss of the majority leader in the U.S. House of Representatives. Even so, the Dow has continued to be a bastion of stability, refusing to turn declines into outright routs and generally tracing a gentle upward slope throughout the past several months. For the Russell 2000 (RUSSELLINDICES:^RUT) and small-cap stocks, however, volatility has been a much bigger concern lately, and some believe that the small-cap index's failure to match the record closes in the Dow Jones Industrials could spell an end to the bull market.

Reversal of fortune
The outperformance of small caps from earlier in 2014 has given way to underperformance since the beginning of the second quarter:

DIA Chart

Stock market data by YCharts.

More tellingly, small-cap indexes have seen much more extreme moves in the recent past than their large-cap counterparts. In the past four weeks, the Dow has failed to move by more than 1% in any single session, but the Russell 2000 has seen 1% moves in both directions, with big moves coming on six separate occasions.

Part of the concern about small caps has come from the fact that they've outperformed the Dow to such a large extent over the past five years:

IWM Total Return Price Chart

Stock market Total Return Price data by YCharts.

As impressive as the Dow's overall gains have been over that timeframe, small caps have done even better. That made sense early in the recovery as small caps had fallen further than their large-cap rivals. But as the bull market aged, small-cap outperformance indicated the continuing belief that nimbler companies could take better advantage of favorable conditions for growth than bigger companies and their greater levels of bureaucracy.

What's next?
If economic growth does indeed slow, then historically, that has led to large-cap outperformance over small caps. Small companies don't have the same resources to work through tough times that large companies have, and the market-share advantages that many large companies have over their smaller rivals tend to last longer when customers who face economic pressures of their own prefer to keep the status quo rather than taking chances with major operational changes. As a result, if the World Bank's predictions prove correct, then the recent small-cap weakness could continue.

Nevertheless, that doesn't mean that the Dow Jones Industrials are doomed to an immediate correction or bear market. In past economic cycles, large caps often enjoy a period of solid returns even when small caps start to let up on the pace of their gains. As unsatisfying an answer as it might be, investors need to stick with making smart choices about individual stocks if they want to find ways to avoid increasing turbulence with the major market indexes.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers