|Domestic equities of all sizes rebounded in 2011’s dynamic fourth quarter. After severely underperforming in the third quarter, small-caps led the way. The small-cap Russell 2000 Index was up 15.5% in the fourth quarter, compared to a gain of 11.8% for both the S&P 500 and Russell 1000 large-cap indexes, and 7.9% for the more tech-oriented Nasdaq Composite.
Despite the strong fourth-quarter rally, small-caps were unable to supplant their large-cap counterparts as 2011’s performance leader. In 2011, the Russell 2000 was off 4.2%, while the S&P 500 and Russell 1000 were up 2.1% and 1.5%, respectively, and the Nasdaq Composite finished the year down 1.8%.
After leading the charge in the first quarter, the Russell 2000 reached a new peak on April 29 and lost ground through the end of the third quarter, declining 13.5% from its late April peak through 12/31/11. Neither the Russell 1000 or S&P 500 surpassed their respective highs made on 10/9/07.
The turning of the calendar resulted in strong three-year returns for domestic equities of all market caps. Dropping off returns from the fourth quarter of 2008 resulted in double-digit three-year average annual total returns for the period ended 12/31/11, with the Russell 2000 up 15.6%, the S&P 500 up 14.1%, Russell 1000 up 14.8%, and the Nasdaq Composite up 18.2%.
Non-U.S. equities fared considerably worse during the year’s final quarter and concluded 2011 substantially behind their U.S. equivalents, with the Russell Global ex-U.S. Small Cap Index up 0.1%, while the Russell Global ex-U.S. Large Cap Index gained 3.6%. For the full year, both the non-U.S. small-cap and large-cap indexes were significantly in the red, down 18.7% and 13.8%, respectively.
According to Bank of America Merrill Lynch, intraday trading spreads for the Russell 2000 exceeded 1% in 83% of all trading days, and exceeded 2% in 39% of all trading days in 2011 through the end of November.
Within small-cap, the Russell 2000 Value Index edged out the Russell 2000 Growth Index for the second consecutive quarter, up 16.0% versus a gain of 15.0%. For the full year, small-cap growth finished on top, although both style indexes were in the red: -2.9% versus -5.5%.
Micro-caps, as measured by the Russell Microcap Index, also enjoyed strong fourth-quarter performance, up 13.8%, though they trailed their larger-cap siblings for the full year, losing 9.3%.