What’s the Story Behind the Russell 2000 Making New Highs?

The Russell 2000 closed on an all-time high yesterday with little fanfare.  Most market watchers tend to focus on the S&P 500 Index as a barometer for the US stock market and of course many casual observers still think of the Dow Jones Industrial Average as the ‘stock market’.  If either of those more widely watched indexes had achieved an all-time high it would have been reported far and wide.  As of Wednesday July 10 the Russell 2000 was up just over 20% for 2013 and the S&P 500 was up 15% – both solid performances.  The chart below adjusts the Russell 2000 and S&P 500 to 100 beginning on 12/31/2012 for a side by side comparison.

RUT SPX

The S&P 500 is comprised of 500 of the largest companies in the United States.  As of the end of the first quarter the top ten stocks in the S&P 500 were AAPL, Exxon Mobil, General Electric, Chevron, Johnson & Johnson, IBM, Microsoft, Google, Proctor & Gamble, and Pfizer.  There are a wide number of industries represented by this list, but there is also one common theme.  These are companies that all operate in multiple countries.  They are impacted as much by the global economy as the US economy.  Although the S&P 500 is represented by domestic companies, these companies operate globally.

The Russell 2000 is a subset of the Russell 3000.  The Russell 3000 is comprised of the 3000 largest stocks trading in the US.  The Russell 2000 is made up of the bottom 2/3rds of those companies by market cap.  A good portion of Russell 2000 companies are domestic in domain and domestic in business exposure as well.  The top 10 stocks in the Russell 2000 as of May 31, 2013 were Pharmacyclics, Owen Financial, Starwood Property Trust, Alaska Air Group, Two Harbors Investment Corporation, Genesee & Wyoming Inc, Alkermes PLC, 3D Systems, Dril-Quip Inc, and Gulfport Energy Corp.  Again there is a variety of industry representation, but with respect to the Russell 2000 these are predominately companies with exposure to the US economy.

The Russell 2000 may be thought of as more of a proxy for the US economy and the S&P 500 may be considered a measure that incorporates the global economy as well.  With emerging markets under pressure, consistent concerns about slowing business conditions in China, and worries about developed markets such as the major European economies it appears the US has been the place to invest for 2013.  It also appears that stocks that have greater domestic business exposure have been the beneficiaries of US strength relative to the rest of the world.  The Russell 2000 making new highs while the S&P 500 is slightly under the 2013 high indicates the markets think this relative strength may continue.